Art auctioneers deliberately using low estimates to entice bidders?

[Dread_Pirate_Mel]

A revealing article from NY Times today.  Applies to high-fallutin' art auctions but maybe to movie poster auctions (with estimated prices) as well?  Here's a portion of the article:

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The Blue-Chip Period
By CAROL VOGEL

OPTIMISM has returned to the multibillion-dollar art market. Expectations are so high that many will be disappointed if Picasso’s 1932 painting “Nu au Plateau de Sculpteur (Nude, Green Leaves and Bust)” doesn’t break the record for a work of art sold at auction when it is offered at Christie’s on Tuesday.

That sale will kick off two weeks of important spring auctions, and bets are that this seminal painting of Picasso’s mistress Marie-Thérèse Walter is poised to eclipse the $104.3 million paid for the current record holder, Giacometti’s “Walking Man I.” The Giacometti was bought in February by Lily Safra, widow of the banker Edmond J. Safra, at Sotheby’s in London.

One reason “Nu au Plateau” could bring such a staggering sum, art experts say, is that it drips with “wall power,” meaning it screams expensive. It is large — more than 5 feet by 4 feet — and has all the hallmarks of a great Picasso, including its subject, Marie-Thérèse (with Picasso’s profile faintly visible in the background), and its palette of rich blues, pinks and greens.

There are other blue-chip works for sale this spring too, including some by Matisse, Mark Rothko, Jasper Johns and Andy Warhol. The appearance of these and other exceptional paintings, drawings and sculptures coincides with growth in the number of buyers. Besides cash-rich Russians and Middle Easterners, there is a noticeable increase in collectors entering the auction market from Asia.

Everyone is betting on the market’s continued strength, realizing that collectors with money to spend are feeling more secure parking their cash in art than in volatile financial markets. Even so, buyers, no matter how rich, are price conscious and want to think they’re getting a bargain. The idea this season is to keep estimates low enough to encourage bidding.

“When you have something great, then the challenge is to convince the consigner to put an estimate that is 10 to 15 percent below the retail price,” said Tobias Meyer, who runs Sotheby’s contemporary-art department worldwide. “It’s all about playing the game of low estimates, and getting people who trust us to play too.”

The estimated price for “Nu au Plateau,” for example, is $70 million to $90 million, though many are banking on it making considerably more.

[CSM]

I certainly think that occurs quite often.

I will admit I have been drawn in to some of the online auctions sites because of ridiculously low estimates and the erroneous hope of getting a great deal when noone else notices the auction...So I watch the item and yet, usually, the price increases to 3/4 times the estimate and I never bid.

These are not sites such as Heritage where they at least have a knowledge of potential final value with estimates that reflect same.

[Bruce]

Mel

This is SOP for Christie's and Sotheby's. When they get a really great piece that they know will do fantastically well, they put a low estimate (sometimes super-low) on it, so that the final result will look all the more impressive. Conversely, some auctions put super-high retail estimates on many items to theoretically trick people into thinking that the item is worth more than it is, and so that it will look like they got bargains if they pay the low estimate, when they may well have paid over retail.

That's why I quit putting estimates on the items I auction. I don't like these kinds of games.

Bruce

[paul waines]

Could not agree more with what Bruce said. You must remember, to these Auctioneers it is a job and or a business, so anything goes.

[Dread_Pirate_Mel]

I've read this article a couple of times and still don't understand the "third party" guarantee they are talking about.  Can somebody explain this?

May 5, 2010
Picasso Sells at Record Auction Price
By SOUREN MELIKIAN

NEW YORK — On Tuesday night, a painting dashed off by Picasso in just one day in 1964 became the most expensive work of art ever sold at auction as it rose to $106.5 million.

It took Christopher Burge, Christie’s premier auctioneer, eight long minutes to raise the picture, dubbed “Nude, Green Leaves and Bust,” above the hitherto unattainable $100 million barrier. Mr. Burge opened the bidding by calling out $58 million and raised the stakes by $1 million increments. From $77 million, four new bidders, sitting in the room or operating over the phone, jumped into the fray. From $86 million on, the contest was confined to two telephone bidders. They fought it out until Mr. Burge brought down his hammer on a $95 million bid made under the paddle number 1709, which, with the sale charge, raised the full price to $106.48 million, to be precise.

Spectacular as it may seem, this figure was not entirely unexpected. Only moments before the auction began, Christie’s specialists were confidently quoting an estimate set at $70 million to $90 million. That estimate had not varied for weeks. This is in marked contrast with what often happens in the auction world, when excitement grows among potential buyers as the auction day approaches, leading auction houses to revise their expectations upward.

Indeed, there was a precise reason for the unwavering assurance displayed by the auction house specialists. A full “third party guarantee” had been negotiated by Christie’s that duly warned prospective bidders, as the law requires. This legal phrase means that the minimum price demanded by the owner consigning the work of art, which remains undisclosed, will be paid to the consignor whether the work sells or not. The financial commitment is made not by the auction house, but by the “third party” willing to have a flutter at the poker game that auctions have become. If the work sells above the guarantee, the difference is shared by the auction house and the third party in question according to variable proportions. These are freely negotiated before the sale and specified in the contract signed by the auction house and the third party, but they are never disclosed to the public.

This complicated arrangement alters the nature of the auction. It is no longer a free contest where the vendor takes his chances and the buyer fights off spontaneous competitors equally wanting to acquire the work.

The first 27 lots in Christie’s auction consigned from the collection of Mrs. Sidney F. Brody were all covered by a guarantee. However, with the exception of the Picasso, this was an ordinary third-party guarantee in which the auction house and the third party jointly shoulder the guarantee according to proportions contractually stipulated but not publicly released.

This did not inhibit buyers. The Brody collection was a phenomenal success. Its lots added up to $224 .17 million. The session was only into its second lot when Georges Braque’s “La Treille” set a world record for the painter at $10.16 million, far above the highest expectations.

Two lots down, the bronze figure of a cat by Alberto Giacometti, cast in 1955, exceeded an estimate that seemed very optimistic, selling for an extravagant $20.8 million. A Marino Marini bronze of a rider, “Piccolo cavaliere” followed at $2.32 million, also more than the highest estimate, and it was then that the record Picasso came up.

The wave of enthusiastic bidding had paved the way for it. The symbol informing bidders that the guarantee had been entirely financed by the third party warned them that Christie’s felt uncertain about the possible outcome at the huge level at which the Picasso was “estimated” and was unwilling to take any financial risk, should the painting not sell at the minimum level that had persuaded the consignor to let go of her property.

The fact that the Picasso did so well, exceeding by $5 million the $90 million upper end of the estimate, says everything about the irrepressible wave of enthusiasm that carried art buyers on Tuesday night. Christie’s specialists candidly admitted that they had worked very hard at vaunting the merits of their offerings to prospective buyers. These are apparently unfazed by the thought that they are effectively made to pay what the vendors want.

The problem is that the method employed artificially whips up prices. It sets the market on the same dangerous inflationary course that precipitated two decades ago an abrupt crash followed by a slump, from which it only recovered gradually after many painful years.

Several other works in Christie’s auction Tuesday were covered by full third-party guarantees, betraying the auction house management’s private jitters about their own ambitions. On the whole they worked satisfactorily.

Alberto Giacometti’s bronze “La main” cast in 1948, climbed to a staggering $25 million, nearly 50 percent more than the high estimate. Later Picasso’s “Femme au chat assise dans un fauteuil,” painted in 1964, brought $18 million, exceeding the high estimate by 10 per cent.

But there were some bad hiccups. Edvard Munch’s “Fertility” painted around 1899-1900 in a wild Symbolist style that lacks the energy of his later Expressionist phase never stood much chance of making it to the astonishing $25 million to $35 million (plus the sale charge) estimate printed in the catalogue. “Fertility” failed to sell as Mr. Burge called out in vain “$23 million.”

Christie’s enjoyed a fantastic success, raking in $335.54 million at the end of the day and thus posting the highest total since 2006. It would be a pity if auction house managers ignored the warning not to overplay their cards that the failure of the Munch and of a few other works, adding up to almost 20 percent of the lots, amounts to.

[CSM]

I must admit Mel, that perplexes me as well...

[Dr Hackenbush]

Auction houses will guarantee a consignor that a piece will reach a minimum price, and if it doesn't "the auction house must pay the seller the guarantee and then sell the artwork, which it now owns, in a private secondary market where buyers regard the property as 'damaged goods' and lower their offers".  What Christie's did is pass of the the risk to a third party that's hedging its bets the work of art will hit the guaranteed minimum.  It's kinda like selling long, or taking the long position, with art work.  Here's part of an article that describes the process in more detail:

"One of the things that I don't understand about the presale coverage for the sales is that no accounts that I've seen have noted that the possible record price for Picasso's Marie-Thérèse portrait could well merit an asterisk. The final price will not be what it seems if the winning bidder turns out to be the third-party guarantor for the painting (an outcome that most likely would not be publicly disclosed).

The "Saleroom Notice" of the online catalogue entry (but not in the hardcopy catalogue entry) for "Nude, Green Leaves and Bust," Christie's discloses this:

Christie's guarantee of this lot has been fully financed by a third party who is bidding on this lot. The third party will receive a financing fee from Christie's, whether or not they are the successful bidder [emphasis added].
In other words, thanks to this fee arrangement (amount undisclosed), the third-party guarantor's net cost for purchasing this painting would be less than the final hammer price plus buyer's premium that anyone else would have to pay. What's supposed to be a "level playing field" among buyers at auction is significantly tilted. The supposed transparency of auction prices is clouded by what are, to my mind, inappropriate and murky side deals.

Sotheby's policy on third-party guarantees differs significantly, keeps the playing field horizontal. In response to my query, press spokesperson Lauren Gioia told me:

A third party guarantor does not bid [emphasis added]. Instead, he simply is a partner on the guarantee and shares in the loss or profit, as they case may be.
Gioia also clarified for me the rules governing irrevocable bids at Sotheby's:

An irrevocable bid is a bid provided by a third party that will be executed during the sale at a value that ensures that the lot will sell. The irrevocable bidder is only compensated if the bidding exceeds the level of the irrevocable bid and another bidder buys the lot. If the irrevocable bidder is the successful bidder, he pays for the lot, including the full buyer's premium, as does every other buyer at Sotheby's, and is not otherwise compensated [emphasis added].
Accountable to shareholders as a public company (unlike privately held Christie's), Sotheby's is still being cautious about offering price guarantees to consignors: It has only one guaranteed work in its Impressionist/modern sale---Picasso's 1965 "Femme au Grand Chapeau. Buste," from the estate of Patricia Kennedy Lawford. It has lined up an irrevocable bid (amount undisclosed) for that work, which is estimated to sell for $8-12 million.

In its recently issued Proxy Statement, Sotheby's was far more measured than the bullish journalists in assessing the current state of the market:

With the international art market showing signs of recovery, improved Company revenue margins, and a significantly reduced cost base, management believes that Sotheby's is well positioned to improve upon its financial results in 2010. At the same time, management remains mindful of the prevailing level of global economic uncertainty and the potential for continued art market volatility.
If journalists' art-market exuberance proves to be irrational (as I think it may), we'll soon be reading postmortem reports that buyers were "selective," with a few breakout prices among otherwise solid, if unspectacular, results. These sales could well be a case of too much material loaded too soon onto a gradually recovering but still delicate market. (There were 84 works offered by the Big Two at last May's Impressionist/modern evening sales, compared to 130 this week.)"

http://www.artsjournal.com/culturegrrl/2010/05/bullish_art-market_predictions.html

[CSM]

Thanks Angelo.

[Dr Hackenbush]

Sure thing, Chris