Auction guarantees: a safe bet?

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A prominent feature of the art market in 2015 is the trend for auction price guarantees. A growing number of third party investors are finding that they can profit by either directly offering such guarantees or raising capital in the form of a fund that enables them to offer such guarantees.

How does an auction price guarantee work?

The auction house, either directly or via third parties, offers consignors of works a guaranteed sale price for their consigned property.  If the artworks sell above the guaranteed price, the seller and the guarantor split or share the sale proceeds in excess of such guaranteed price.

For example, a $5 million artwork could have a $4 million to $5 million estimate and a reserve of $3.5 million.  A guarantor could guarantee a $4 million price for the work and if the work actually sells for $6 million could receive substantial portion of the $2 million sale proceeds in excess of the $4 million guaranteed price, all for simply taking the risk that art work would sell for less than $4 million.

The beauty of an auction house guarantee is that it often seems a safe bet for both the seller and the guarantor – and helps the auction house secure something that is vital to its success: a supply of quality lots that would otherwise have remained stashed away in private collections.

“The worst case scenario if you’re the guarantor is that the piece will fail to sell for the amount guaranteed – but that’s not a disaster because you still have the piece and you can hold it for a few years sell it, possibly for even more than the amount you paid.”

“The worst case scenario if you’re the guarantor is that the piece will fail to sell for the amount guaranteed – but that’s not a disaster because you still have the piece and you can hold it for a few years sell it, possibly for even more than the amount you paid,” says Enrique Liberman, president of the Art Fund Association and Chair of the Art Law + Art Funds practice group at Bowles Liberman & Newman LLP.

He adds that the key to being a successful guarantor is gaining access to lots that have a great chance of selling for above the specified price, but which have a wary owner who is reluctant to take a risk on it.

“You really want guarantees where the collector is being overly conservative,” he says. “You have to find the great guarantees, the ones that are not as risky – but of course, these are the ones the auction house themselves may do, and there might be some preferred guarantors, or some competition for those particular preferable guarantees.

“It’s certainly an attractive side of the market because you can make some substantial returns, especially as you’re not really deploying the capital unless you are required to honor the guaranteed price.”

In order to navigate this world successfully, however, the aspiring guarantor needs to secure the right advice and guidance.

“You need a good connection – a prominent dealer, someone who worked in the auction houses before. You need connoisseurs who are experts in the market; someone who really understands the art market, who can help you decide which guarantees are a  safe bet.”

 

‘Quality Instrument’ photo courtesy of Jess  under Creative Commons license.