Third Party Guarantees

The NY Observer has an interesting article on the Warhol that just sold for $63 million at Phillips. I have posted on the lack of transparency of third party bids and guarantees in the past. The article deals with third party guarantees, and how the selling price might be completely different (and lower) than the hammer price of the lot.

The article points out that if the winning bidder is also guaranteeing a portion or all of the lot, they might not be paying the full hammer price. This does not sound fair to the under-bidder. The article notes that Sotheby's does not compensate third party bidders when they win, but it appears Christies does and possibly Phillips as well.

The NY Observer reports

Here's how these "insider" auction deals usually work: days or months before an auction, a collector, dealer or even a financial entity promises to pay the seller X amount for an artwork if no one else bids for it. Such arrangements are usually called "third-party guarantees." They remove the element of risk for the seller and enable the auction house to get better property. When the artwork finally does come up at auction, the third party gets a percentage of what it sells for, in exchange for that early willingness to commit funds. But if the person who guaranteed it is also the winning bidder, that may mean he or she doesn't, effectively, pay the reported price.

Sound confusing? Here's exactly how Christie's spells it out in the auction catalogue (Sotheby's said it structures such deals differently, and does not compensate its third-party bidders when they win, to "ensure a level playing field"): "When a third party agrees to finance all or part of Christie's interest in a lot ... [it] will be renumerated in exchange for taking on this risk. The third party may also bid on a the lot [which would be announced at the auction]. When it does so, and is the successful bidder, the renumeration may be netted against the purchase price."

To read the full article, click HERE.