If you follow auctions, you will notice that almost all of them utilize a buyer’s premium in an aution. This will cause many of you to wonder, “What does buyers premium mean at an auction?
What is Buyers Premium in an Auction?
A buyer’s premium is a fee, usually in the form of a percentage of the price, that is added to a sale price, or what is sometimes called the “hammer price” in an auction, to arrive at the total price for an item.
How does Buyer Premium Work at an Auction?
Example: A piece of equipment in an auction sells for $100. There is a ten percent (10%) buyer’s premium charged at the auction. The total price (before any applicable sales tax) would be $100 times .10, giving a buyers premium of $10 and a total price of $110.00
Purpose of a Buyer’s Premium at an Auction
The buyer’s premium in an auction can be utilized for many reasons. The actual percentage of the buyer’s premium is agreed upon by the auctioneer and the seller and the fee can be used to offset expenses of the auctioneer, offset expenses incurred by the seller, reduce the commission paid by the seller, or a combination of all of the above. There are many expenses involved in conducting an auction. Marketing, preparation of the assets, such as cleaning or repairing, labor to set up the auction items and organize them, labor to tag and catalog the items, security for the site or on auction day, labor to oversee inspection or preview, labor to oversee checkout and removal of the items after the auction, auction software platform fees, insurance for the items or the insurance for the auction staff. Auction houses have overhead including insurance, taxes, and rent as well. If the auction site is out of town, for the auction company, there are also travel expenses involved. Sometimes the buyer’s premium in an auction is used to make the auction possible, because, without it, the expenses of the auction may be too great.
Factors Affecting Buyer’s Premium
The factors affecting the buyer’s premium in an auction are numerous. Tradition plays a role in buyer’s premiums for many different types of auctions or types of merchandise sold in a particular auction. Some of the highest percentages of buyers’ premiums are found in art, antique, and collectible auctions (usually over twenty percent). It is reasonable that a bidder will bid more for an item that is rare and difficult to find or possibly one of a kind. Bidding on antiques and collectibles in an auction can involve a bidder’s emotion or “getting caught up in the moment” and can cause a bidder to ignore a buyer’s premium when they rationalize how much they would pay for an item.
In auctions for assets such as real estate, the percentage of a buyer’s premium is usually much lower (usually under 10 percent) and mirrors the traditional commissions paid for real estate. Other factors such as regions of the country may play a factor in the buyer’s premium amount.
Final Words
Since a buyer’s premium is almost always present at auctions, it is important for bidders to pay close attention to this fact and read the terms & conditions before they bid. Bidders should never assume the amount of the buyer’s premium. The buyer’s premium should always be found in the auction terms & conditions and will usually be announced by the auctioneer in their opening statement at a live auction.
FAQs
What is a buyer’s premium in real estate?
In a real estate auction, a buyer’s premium is a fee, usually in the form of a percentage of the price, that is added to a sale price, or what is sometimes called the “hammer price” in an auction, to arrive at the total price for the real estate being sold.
What is the difference between a buyer’s premium and a seller’s commission?
A buyer’s premium is paid by the buyer. A seller’s commission is a fee paid by the seller to the auctioneer.
Who pays auction fees, the buyer or the seller?
Every auction can be different. If a buyer’s premium is being charged in the auction, it can be considered that the buyer is paying some fees. The final decision on who pays the fees is determined by an agreement between the seller and the auctioneer.
Who gets the buyer’s premium at the auction?
Every auction can be different. Who receives the buyer’s premium is determined by an agreement between the seller and the auctioneer.
Who sets the buyer’s premium?
The auctioneer usually suggests the buyer’s premium amount in their negotiations with the seller.
How do I pay the buyer’s premium?
The buyer’s premium will be a line item charge on your invoice from the auctioneer.
Is the buyer’s premium taxable?
is considered part of the final price and is taxable. That being said, it is dependent on the particular state’s sales tax law.
Does the amount of buyer’s premium vary between auction companies?
Yes, it can. The buyer’s premium amount can vary between auction companies depending upon what they are selling and the expenses incurred for that particular auction.
Can the buyer’s premium be negotiated or waived in an auction?
Usually, no. Most auction companies will not negotiate or waive a buyer’s premium as it would not be fair to other bidders.
Does the type of auction affect the amount of the buyer’s premium charged?
Yes, it can. Bidders should never assume the amount of a buyer’s premium.
Is the buyer’s premium included in the advertised starting bid price?
Buyer’s premiums are traditionally not included in a sale price or hammer price in an auction.
Is it mandatory to pay the buyer’s premium in an auction?
Yes, if a buyer’s premium is being charged at the auction in question, it will be mandatory for the buyer to pay that amount on their invoice.
Can the buyer’s premium be a determining factor in the bidding strategy?
Certainly, a wise bidder should take into consideration the amount of the buyer’s premium if they have a budget for a particular item.
