Auction Cash Advances

I just arrived in Chicago for the ISA sponsored SEAK expert witness class and annual conference. With that, posting over the nex 5 or 6 days may be sporatice at best.

Fellow appraiser Xiliary Twil sent me an interesting article from the Wall Street Journal on how auction house financial divisions are making cash advances against consignments. I have posted on this in the past, but this article goes into more detail, and shows it is also happening in the sub-million range as well.

The Wall Street Journal reports

Large auction houses have long offered loans to their “art rich, cash poor” clients, using a piece of art, jewelry or other collectible as collateral. But a growing number of both large and small auctioneers are taking it a step further and offering some clients a new perk: an interest-free cash advance on a piece consigned for sale.

The cash advance allows a person whose principal assets are illiquid—in the form of valuable artworks and other collectibles—to quickly tap the equity of those assets. This is especially appealing to collectors who have large short-term financial needs and can’t wait for that consigned painting, sculpture or necklace to actually sell—which can take months or even years, in some cases.

And the perk can give auction houses a competitive advantage over art galleries—which typically don’t offer cash advances on consignments—by putting money in the seller’s pocket right away.

“Loans and advances against consignments are part of the industry that is growing the fastest,” says Thomas B. McCabe IV, vice president in charge of business development and private sales at Freeman’s auction house in Philadelphia.

Money on the Spot
The amount of an advance typically ranges from one-quarter to one-half of the estimated value of a consigned piece. The auction house takes physical possession of the artwork, and once the piece is sold, the seller receives the sale price less the advance, sales commission and other fees.

So, for instance, the consignor of piece estimated at $100,000 might receive an advance of $25,000 and, after a sale price of $100,000, an additional $55,000 (deducting a 20% commission).

Since auctioneers are more likely to pay an advance on pieces they expect to sell and sell well, a consignor may be in a stronger position to negotiate fees. Auctioneers also earn money from the buyer’s premiums—typically 12% to 25%—so they may be willing to take less on the seller’s end.

But what if the artwork fails to sell at auction? The piece is likely to be offered at a subsequent sale, and interest on the advance may be charged, although that rarely happens. However, if a piece continues not to sell, the auction house may demand its money back or charge interest on the advance and call it a loan.

At Freeman’s auction house, for example, a consignor pays an annual interest rate of 10% on the unpaid balance of the advance after 35 days if an object hasn’t sold, according to the company’s written terms and agreements. The other option is just to return the advance within the 35 days without any penalty.

Mr. McCabe says cash advances are a “courtesy” available to certain consignors who make the request. “We’re not a bank or a pawnshop,” he says, but adds that the cash advances are incentives to prospective consignors in a competitive auction field. “We know there are other auctioneers out there who will advance the money if we don’t.”

Case by Case
Decisions on giving advances tend to be on a case-by-case basis. A known client is somewhat more apt to receive an advance. A rare, sought-after item is more likely to bring the consignor an advance than one that’s not as assured of selling at auction or for a sizable price. “Jewelry is always popular and is likely to merit a higher advance than something that might not sell as easily, such as, say, something from antiquity,” says Joanne Porrino Mournet, executive vice president at auction house Doyle in New York.

Sotheby’s Financial Services makes both cash advances against consignments (generally, at 50% of the low estimate) and the traditional direct loans of no less than $1 million with renewable two-year terms. “We generally lend to clients who we’ve worked with in the past, whether as buyers or sellers,” says Jan Prasens, managing director of Sotheby’s Financial Services.

The perk doesn’t appear to be catching on with art dealers, however, who tend to not give cash advances on consigned pieces. “If you can guarantee that something will sell,” says Maxwell Davidson IV, senior director of Maxwell Davidson Gallery in New York, “you are confident enough to buy it outright, rather than take it on consignment and advance cash against a sale.”

Source: The Wall Street Journal