In this article
An auction house works as an agent for the seller: it takes an item on consignment, values it, catalogues and markets it, offers it to competing bidders on a fixed date, collects the price from the winner, and pays the seller that price less an agreed commission and charges. The house earns on both sides of the same lot, through a seller's commission deducted from the hammer price and a buyer's premium added on top of it.
The terms that matter to a consignor, from the confidential reserve to the date the money arrives, are fixed in the consignment agreement weeks or months before anyone raises a paddle. This article takes the business in the order a seller meets it, with a worked net on illustrative rates. Practices and law vary by house and by country; where a legal rule is stated, its jurisdiction is named, and all of it is general information, not legal or tax advice.
Worked example on illustrative rates stated in the article: 10% seller's commission, 25% buyer's premium, 1.5% loss and damage cover, $2,000 of fixed charges. Real rates differ by house, category and value.
What does an auction house do, stage by stage?
An auction house runs each lot through the same sequence: it sources the item, signs a consignment agreement, researches and catalogues it, markets the sale, conducts the auction, collects from the buyer and settles with the seller.
- Valuation and proposalA specialist examines the item, or photographs of it, and proposes an estimate range, a sale date and terms. A valuation given to win a consignment is an opinion of what bidders may pay, not a promise.
- Consignment agreementYou sign a contract appointing the house as your agent for that sale. It fixes the commission, the charges, the reserve, who insures the item and when you are paid.
- Collection, research and cataloguingThe item goes to the house. Specialists check attribution, provenance and condition, photograph it and write the catalogue entry and the condition report.
- Marketing and viewingThe catalogue is published, the lot is shown to known buyers and displayed at a public viewing. Bidders register and leave absentee bids or book telephone lines.
- The saleThe auctioneer opens the lot, takes bids from the room, the telephones, online platforms and the absentee book, and either knocks it down to the highest bidder or passes it if the reserve is not met.
- Collection from the buyerThe house invoices the buyer for the hammer price, the buyer's premium and any tax, and releases the lot only against cleared payment.
- Settlement with the sellerThe house sends you a settlement statement and the hammer price less its commission and charges, on the date the agreement sets.
The whole cycle commonly takes a few months, because sales in each category are held on a calendar. A seller who needs money by a given date should ask at the first meeting for the consignment deadline of the next suitable sale and the settlement date that follows it.
Where does an auction house find what it sells?
An auction house finds its lots through its specialists, who are assigned to a category and spend most of the year persuading owners to consign. Estates, collectors reshaping a collection, dealers, institutions and the advisers around them, such as lawyers, trustees and wealth managers, are the main sources.
Supply is the scarce side of the business, so houses compete for consignments on terms: a lower seller's commission, a waived charge, a prominent catalogue position, sometimes a guarantee. The better and rarer the item, the more of the standard terms are open to negotiation.
Before accepting an item, the house also checks that it can sell it. It will ask for proof of ownership, provenance documents, invoices, certificates and export or import papers, and it will ask who you are. In the United Kingdom, HM Revenue and Customs guidance states that a business trading in works of art, or acting as an intermediary in their sale, must register with it for money laundering supervision where a transaction or a series of linked transactions reaches 10,000 euros or more. Rules of that kind, which exist in other countries in other forms, are one reason a consignor is asked for identification before a contract is issued.
What does the consignment agreement commit you to?
The consignment agreement appoints the auction house as your exclusive agent to sell a named item in a named sale, and sets every term that decides what you receive. You remain the owner until the lot is sold and paid for; the house holds the item and sells it in its own name on your behalf.
| Term | What it sets | What to check |
|---|---|---|
| Seller's commission | The percentage of the hammer price the house keeps | Whether it is flat or tiered, and what happens to it if the lot sells below the low estimate |
| Charges | Photography, illustration, transport, storage, restoration, testing | Which are fixed, which are capped, and which are due even if the lot is unsold |
| Loss and damage cover | Who bears the risk while the house holds the item | The rate, the insured value and when cover starts and ends |
| Reserve | The confidential minimum hammer price | The figure, and whether the house may sell below it at its own cost |
| Withdrawal | Your right to pull the lot, and the house's | The fee you owe if you withdraw after signing |
| Warranties | Your promises on ownership and authenticity | Your liability if the sale is later cancelled |
| Settlement | The date and method of your payment | Whether payment depends on the buyer having paid |
Two of these terms deserve particular attention. The first is the set of warranties: you confirm that you own the item, that it is free of claims and that what you have told the house is true. If a sale is cancelled later because the item turns out not to be as described, the agreement typically lets the house refund the buyer and ask you to return what you were paid. The second is exclusivity: once signed, the agreement normally prevents you from selling the item elsewhere, and withdrawing it triggers a fee.
How are the estimate and the reserve set?
The estimate is the published range within which the specialist expects the lot to sell, and the reserve is the confidential minimum below which the house will not sell it. The two are set together, and by long-standing convention written into many houses' conditions, the reserve is not placed above the low estimate.
An estimate does two jobs that pull against each other. It tells bidders roughly what they will need, and it is the figure the specialist uses to win your consignment. A high estimate narrows the field, and a lot with one interested party sells at the reserve or not at all. A moderate estimate brings more people to the opening bid, and competition between them is what carries a price above the range.
The reserve protects you from a thin room. It is agreed in writing, usually close to the sale once interest can be gauged, and it is not disclosed to bidders. The worked example in this article uses a painting estimated at $80,000 to $120,000 with a reserve of $70,000. The choice behind that number is a higher floor against a higher risk of no sale.
What do cataloguing and the condition report do for the price?
Cataloguing turns an object into a lot that a stranger can bid on with confidence, and the condition report tells that stranger what is wrong with it. Both are written by the house, both shape what bidders are prepared to pay, and both draw on what the seller can supply.
The catalogue entry states what the house is prepared to stand behind: the maker or artist, the date, the materials, the dimensions, the provenance, the exhibition and publication history. The wording follows house conventions that grade certainty, so an item given to a named maker outright is a different proposition from one described as attributed to that maker or from the same workshop. Every document you can produce moves the description toward the more confident end.
The condition report records wear, damage, repairs, replaced parts and restoration, and is sent to bidders who ask for it. Bidders tend to discount more heavily for what they cannot assess than for a flaw that has been measured and photographed. Where restoration or a technical test would help, the house may propose it at your cost; agree the amount in writing first. Marketing follows: placement in the catalogue, direct approaches to known collectors, press and online listings. Ask what is planned for your lot specifically.
What does the auctioneer do during the sale?
The auctioneer conducts the bidding, decides whose bid is accepted and at what increment, and ends the sale of each lot with the fall of the hammer. Until that moment nothing is sold; at that moment a contract of sale exists between the seller and the highest bidder.
Bids reach the rostrum from four directions: people in the room, staff on telephones relaying bids for clients, online bidding platforms, and the book of absentee bids left in advance, which the auctioneer executes on behalf of the absent bidder at the lowest price the competition allows. The auctioneer opens below the reserve, raises the price in steps that grow as the figure climbs, and keeps the discretion to refuse a bid or reopen the bidding in a dispute.
The legal moment is defined in statute in many places. In the United Kingdom, section 57 of the Sale of Goods Act 1979 provides that a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer or in another customary manner, and that a bidder may retract a bid until then. In the United States, section 2-328 of the Uniform Commercial Code, the model text that states enact with their own variations, says the same about completion, and adds that an auction is with reserve unless the goods are expressly put up without reserve. If the bidding stops below the reserve, the auctioneer announces the lot as passed, and it is recorded as unsold, also called bought in.
Can the auction house bid on the seller's side?
An auction house may bid on the seller's behalf up to the reserve only where the law of the place and the published conditions of sale allow it, and never at or above the reserve. These bids exist to carry the price up to the level at which the lot can actually be sold; they cannot be used to push a real bidder past it.
In practice, the conditions of sale of a house that uses this method state that the auctioneer may bid for the seller, by consecutive bids or in response to other bidders, up to the amount of the reserve. A bidder in the room often cannot tell these bids from a competitor's. Once the reserve is reached, every further bid has to come from a genuine buyer.
The Sale of Goods Act adds a limit on numbers: where a right to bid is expressly reserved, the seller or any one person on the seller's behalf may bid, and no more. The Uniform Commercial Code carves out forced sales from its rule. Other countries regulate the point differently, so the conditions of sale for the saleroom you are using are the document to read. For a consignor, two things follow: you may not bid on your own lot or ask someone else to, and the house's bids on your side stop at the reserve, which is the only floor you have.
What are guarantees and irrevocable bids?
A guarantee is a promise by the auction house that the seller will receive a minimum amount whatever happens in the saleroom, and an irrevocable bid is a binding bid placed before the sale by an outside party at an agreed level. Both replace the uncertainty of a reserve with a committed price, and both cost the seller part of the upside.
| Arrangement | Who bears the risk of no sale | What the seller gives up |
|---|---|---|
| Reserve only | The seller: an unsold lot comes back | Nothing beyond the standard commission and charges |
| House guarantee | The house: it pays the minimum and may end up owning the lot | A share of the price above the guaranteed amount |
| Third-party guarantee or irrevocable bid | An outside party, who buys the lot at the agreed level if nobody bids higher | A fee or a share of the upside, paid to that party through the house |
Take the same painting with a guarantee of $90,000 on the hammer price and an even split of anything above it, both figures illustrative. If it sells for $100,000, the overage is $10,000 and you are credited $95,000 before commission and charges, which is $5,000 less than without the guarantee. If it sells for $150,000, the overage is $60,000, you are credited $120,000 and the guarantor keeps $30,000. If nobody bids to $90,000, you are still credited $90,000, which is $20,000 above the reserve you would otherwise have relied on.
Houses offer guarantees selectively, and often pass the risk to a third party, who commits in advance to bid at the agreed level and is paid for doing so if someone else buys the lot. That party knows the floor and has a financial interest in the result, which is why houses generally mark such lots in the catalogue or announce the arrangement from the rostrum. A seller offered either arrangement should ask what the split is and whether the commission still applies on top.
How does an auction house earn its money?
An auction house earns its money from two commissions on each sold lot, the seller's commission and the buyer's premium, and recovers part of its costs through charges to the seller. A smaller share comes from private sales, lending against consigned property, storage and its share of guarantee upside.
The buyer's premium is a percentage added to the hammer price and paid by the buyer, usually on a sliding scale that falls as the price rises. The seller's commission is a percentage of the hammer price deducted from what the seller receives. How the premium is tiered and taxed is covered in the blog's article on what a buyer pays on top of the hammer price; what matters here is that bidders set their limits with the premium in mind, so part of it comes, indirectly, out of the hammer price you achieve.
Against that income the house carries specialists, salerooms, catalogues, shipping, insurance, compliance checks and the buyers who pay late or not at all. Its interest is mostly aligned with yours, since both commissions rise with the hammer price, with one difference: the house would rather sell at a modest price than not sell, while an owner with no deadline may prefer to keep the item.
What does a seller net on a $100,000 hammer price?
On a $100,000 hammer price, a seller paying a 10% commission, 1.5% for loss and damage cover and $2,000 of fixed charges receives $86,500. Those rates are illustrative, chosen to show the mechanics; your own agreement supplies the real ones.
| Line on the settlement statement | Basis | Amount |
|---|---|---|
| Hammer price | Winning bid | $100,000 |
| Seller's commission | 10% of the hammer price | −$10,000 |
| Loss and damage cover | 1.5% of the hammer price | −$1,500 |
| Illustration and marketing fee | Fixed | −$1,200 |
| Transport to the saleroom | Fixed | −$800 |
| Net paid to the seller | Hammer price less $13,500 | $86,500 |
The buyer of that lot, at an illustrative flat premium of 25%, pays $125,000 before any tax. The house's commission income is therefore $35,000, the $10,000 from you and the $25,000 from the buyer, and it recovers $3,500 of costs through the charges. Your net is 86.5% of the hammer price and 69.2% of what the buyer paid. The second percentage is the one to use when comparing an auction with another way of selling.
Tax is left out on purpose: depending on the country, the seller's status and the item, sales tax or VAT may apply to the commission and charges, and the seller may owe tax on a gain.
How does the seller's net move with the hammer price?
The seller's net rises slightly faster than the hammer price, because fixed charges weigh less on a larger sale, while the gap between what the buyer pays and what the seller receives widens in dollars. On the same illustrative rates, the net is 85.6% of a $70,000 hammer price and 87.2% of a $150,000 one.
Worked example: 10% seller's commission, 1.5% loss and damage cover and $2,000 of fixed charges deducted from the hammer price; 25% flat buyer's premium added to it. Taxes, resale royalties and delivery are not included.
The difference between the two bars is $27,550 at the reserve and $56,750 at the top result. That is the price of access to competing bidders, of a description the house stands behind and of collecting the money. For an item several people want, the last few bids can add more than the whole spread; for an item with one natural buyer they cannot, which is the subject of the comparison between private sale and auction treated elsewhere on the blog.
What happens to a lot that does not sell?
A lot that fails to reach its reserve is passed, remains the seller's property, and can be sold privately after the sale, offered again later or collected. The seller usually still owes the charges that were incurred, and sometimes an unsold fee.
In the worked example, the seller of the unsold painting owes the $2,000 of fixed charges and, if the agreement bases the cover on the reserve when there is no hammer price, 1.5% of $70,000, or $1,050: $3,050 in total, for no sale.
There is a second cost that no statement shows: a public failure at a published estimate stays on record, and the next buyer will ask why. It is the strongest argument for a moderate estimate.
The most common outcome for a passed lot is an after-sale offer. In the hours and days after the auction, the house goes back to the underbidders and to anyone who showed interest, and brings you the best offer it can find, typically at or a little under the reserve. You are free to refuse. If you accept $65,000 on the same terms, the commission is $6,500, the cover $975 and the fixed charges $2,000, leaving $55,525. Check that the agreement applies the same commission to an after-sale as to the auction, and for how long after the sale the house keeps the exclusive right to sell.
When is the seller paid?
The seller is paid on the settlement date written in the consignment agreement, commonly a set number of days after the sale, and in most agreements only if the buyer has paid the house in full by then.
That condition matters more than the date. A buyer who pays late delays the seller; a buyer who never pays leaves the house and the seller to choose between pursuing the debt, cancelling the sale and reoffering the lot, or selling to the underbidder. The agreement should say who decides and who bears the cost. That, and where the proceeds are held in the meantime, are covered in the blog's article on how an auction house releases proceeds to a consignor.
With the payment comes the settlement statement. Compare it line by line with the agreement: the hammer price, the commission rate and each charge against what was agreed or capped.
What should a seller ask before signing?
A seller should ask, before signing, for every figure that affects the net and every rule that applies if the lot does not sell, and get the answers in the agreement itself.
- What is the seller's commission, is it tiered, and does it change if the lot sells below the low estimate or by after-sale?
- Which charges will be deducted, what is each one's amount or cap, and which are due if the lot is unsold?
- Who bears the risk of loss or damage from collection to payment, at what value and at what rate?
- What reserve do you recommend, when is it fixed, and may the house sell below it if it makes up the difference?
- If a guarantee is offered, what is the guaranteed amount, how is the upside shared, and is a third party involved?
- On what date is payment made, does it depend on the buyer paying, and what happens if the buyer defaults?
- If the sale is cancelled after payment, in which circumstances must the proceeds be returned, and for how long does that exposure last?
Put the same questions to two houses and the proposals become comparable on something firmer than the estimate. The higher estimate is the least binding number in either proposal; the commission, the charges, the reserve and the settlement terms are the ones that will appear on the statement.
