How Not To Get Burned at Auction
The art market, particularly the auction world, can be extremely exciting and dramatic. We all hear stories from top news sources about the most recent record-high sums paid for works of fine art. However, while some sellers win big by consigning at auction, others end up getting “BURNED.”
You’re going to want to learn about “burning” because it could ruin your chance of selling artwork for many years to come (at least, for a good price).
What is Burning?
Burning is when an item goes unsold at auction. Auction houses like to refer to these items as “bought-in” (even though very few auction houses nowadays will actually buy unsold lots from sellers). An item can be burned if no one bids on it or if it does not reach the reserve price.
What does that mean?
A reserve price is the minimum price a seller will accept to relinquish their item. Not all items have a reserve price. Items can be sold “without reserve,” which means that it sells to the highest bidder. Period. No backsies. A reserve is often set by the auction house and the seller together, at 70% of the low estimate for the item. For instance, if the auction estimate for an object is $10,000 – $12,000, the reserve would be 70% of the $10,000: $7,000. Thus, if the bidding only reaches $6500, the item goes unsold or “bought in” by the auction (which may or may not be true).
Why is this such a bad outcome?
Because auction results are public information. Forever and henceforth, the public will know that no one bid up the item to the reserve price, meaning the estimate was too high and the item overvalued even at the reserve. Actually, any combination of events could have affected the outcome, even the weather. If no one can physically attend and examine a piece, it may not get any bids. The results don’t reveal why, they just record “unsold.” And for a substantial time into the future, “unsold” means the work is “burned.” If one tries to sell again shortly thereafter, the public may very well assume it is NOT worth 70% of the low estimate of the last time it was presented for sale. True or not.
Setting realistic reserves on an item is important, in order not to burn it. Some people wrongly choose to sell their object(s) with the auction house that gives them the highest estimate…and the highest reserve. It is like asking $2 million for a $1 million house. The object will not be looked at by the right buyer. The right buyer will be looking at other properties, either in price or quality. As it fails to sell, not only do you still own the item, you will have even more difficulty selling it for the “right” price.
Pelican, Peter Doig.
Unsold at July 1, 2015 Sotheby’s London Contemporary Art Evening Auction. (Estimate $9.3 – $12.5 Million USD). Pelican had a well-documented provenance, had been exhibited 6 times at respected art spaces since 2004, and is considered a prime example of both Doig’s working technique and dreamlike mood. The story behind the work was even captured in print when the artist describes seeing a man attempting to kill a wounded pelican on the beaches of Trinidad.
What could be the rest of the story?
Who knows? An inquiry to the London auction house only confirmed the piece is no longer available. Would the sale manager even reveal the truth?
In fact, in fine-art auctions approximately 20% to 30% of the objects up for bid don’t sell at all. (WSJ 2008).
Well, even though the high-end auction houses pride themselves on transparency, sales of “bought-in” items are common behind private, closed doors. These sales are possible because sellers (often dealing with one of the 3 D’s: Death, Divorce, Downsizing) are eager to sell and willing to go below their reserve price. Dealers are often part of the post-auction buyers looking for bargains on “leftover” lots. In this scenario, the buyer has the upper hand because unsold art is “burned,” unable to be put back at auction for the same price it was before. Some buyers purposely won’t bid on items they like, particularly if they think it is priced too high, in the hopes it goes unsold so they can do an after-hours sale.
As auctioneers will hasten to explain, not all post-auction sales are discounted. Some buyers are legitimately unable to participate in an auction and will willingly pay the reserve price. However, remember that the reserve price is supposed to be the lowest possible price the item should sell for. No matter how eager the buyer, there is no denying they gain the upper-hand when art gets burned.
Would an auction house ever be complicit in burning an item, perhaps to help a favorite buyer get a deal?
Auction houses are in the difficult situation of making both their buyers and their sellers happy. Do they have any fiduciary relationship to the seller? Are they, in any way, biased?
Certainly, the power to affect the likelihood of a burning is in the auctioneer’s hands. The auction house advises on the sale estimate and the appropriate reserve price. Furthermore, the auctioneer has the power to skip over items at his or her discretion, if they believe the work of art will not sell for a good enough price.
This is not to say that all auction houses will rip you off. Certainly, it is in the auction house’s interest for your works to sell. That said, consigning to auction is risky and comes with the chance of burning. To add a further sting to the wound, some sellers end up losing money when their items don’t sell because they may have to pay for un-recouped photography, cataloging, insurance and shipping fees. This creates even more incentive for sellers to take low deals when their items get burned. To help navigate the tangled territory of auction sales, it can be helpful to have a player knowledgeable about the art industry who only has your best interests at heart. A good, well-versed, certified and accredited appraiser will have contacts in the auction houses and the private dealer circles, so they can ensure that you get the highest possible price for your item. Without one, you can still win big, but you’re playing with fire.
Co-Authors: Lynn Magnusson, ASA, AAA and Becky Lipnick, Communications Coordinator