Auction Reserves, Opening Bids, Presale Estimates

Q: I don't understand auction presale estimates, reserves, and opening bids very well. I see these dollar amounts at both online and traditional auctions. Are they what the art is supposed to sell for? What's the difference between these values and what the art is actually worth? Why do some art pieces sell for much more than estimates or opening bids while others don't get final bids anywhere near these amounts? Please explain.

A: In the traditional auction world, auction houses use presale estimates, reserves, opening bid amounts and past auction sales history and performance to decide whether or not to take various works of art on consignment. When they accept art, those values then help them determine which sales to put it in and how high or low to start the bidding. Auction houses need to know these figures because, from an economic standpoint, they only want art that they believe they can sell at or above certain minimum dollar amounts. They certainly don't want to waste time or even lose money on art that either sells for less than predetermined minimums or fails to sell at all. (Online auctions like eBay are different as you'll see later.)

The accuracy of presale estimates, reserves, and opening bids depends on the abilities of auction house employees to locate and interpret past sales data about the art they are considering selling. The dollar amounts they come up with are basically educated guesses about what they think that art is worth. Presale values are based primarily on how much similar works of art have sold for at auctions in the recent past, but can at times be based in part on retail gallery selling prices as well. Also taken into consideration are factors like the art's condition, how important it is, what the subject matters are, the economic health of the marketplace, the current popularity of the artists with collectors, and so on.

For bidders, presale values serve as rough guidelines of what auction houses think art will sell for. They are primarily for people who don't have the time, reference libraries, or skills to research dollar values on their own (recommended procedure, however, is that auction buyers always research art independently before bidding). Presale estimates, reserves, and opening bids are not to be taken as gospel, either in terms of what art is actually worth or what it will end up selling for. Once a sale begins, just about anything can happen.

At traditional bricks and mortar auctions, presale estimates are sometimes way off in one direction or another because final selling prices get influenced by variables such as rumors, gossip, bidding wars, good or bad publicity, bidder psychology, and even the weather. In other cases, a painting's owner might insist on an unrealistically high reserve, a very low reserve might be set in error because a critical piece of research data is missed by an auction house but spotted by collectors, a condition problem might turn out to be worse than the auction house originally thought, and so on.

Another reason why presale estimates can be way off is that they're deliberately manipulated by the auction houses themselves, usually to the low side, in order to pack sales rooms and attract future consignors. The lower the estimates, the more likely potential buyers are to attend sales in hopes of snaring bargains. Likewise, consignors prefer doing business with auction houses that appear to be selling merchandise at prices much higher than those that were initially "expected."

From public relations and marketing standpoints, deliberate low estimates and the resulting "high" selling prices occasionally attract huge amounts of media attention. A perfect example of this was the Jacqueline Kennedy Onassis sale held some years ago at Sotheby's. The auction house purposely estimated certain items as though they had no particular ownership history or significance-- the classic example being her triple-strand imitation pearl necklace, estimated to sell only in the low hundreds of dollars even though she had worn it at historically important events, documented as such in photographs, like a classic image of her holding daughter Caroline as a baby. It sold for north of $200K. Another notable example was Andy Warhol's cookie jar collection offered at his estate auction, the various jars estimated to sell on average from $50-$100 each, a number of which ended up selling in the mid to upper thousands of dollars. This would be like cataloguing the baseball bat Babe Ruth used to hit his 714th home as "baseball bat, circa 1920's" with an accompanying estimate of $100-$200.

The auction houses knew very well that hammer prices would far exceed the estimates in these instances. The relatively uninformed mass media, however, was totally taken in by the deceptions. They bit the bait big time and reported with banner headlines how crazed fans were bidding fortunes for worthless pieces of junk jewelry or cookie jars when, in fact, they were actually paying fair prices for historical artifacts that once belonged to very famous people. The auction houses' names name got splattered all over the Internet, radio, television and in the print media around the world in a public relations coup of monster proportions. The attention would not have been nearly as great nor the stories nearly as sensational had the auctions instead set realistic estimates that reflected the true historic importance of the merchandise.

Rather than portray the sales as unbelievable feeding frenzies, more informed reporters might have asked questions like:

"What made you think these Kennedy Onassis or Warhol items would sell so cheaply?"

"Are you considering firing your entire staffs of so-called experts and replacing them with people who know how to set realistic presale estimates?"

"Since when do you sell items like fake pearls or old cookie jars with really low estimates at major sales? Perhaps you'll let me consign our old cookie jar or a pearl strand I bought for my wife at Ross Dress for Less. We need a new Mercedes."

In sharp contrast to traditional auctions, opening bids and reserves at online auctions like eBay may or may not have any relationship whatsoever to the actual values of the whatever's being sold. Sellers are allowed to set whatever reserves or opening bids they feel like setting. In other words, if Mr. Jones owns a painting that he won't sell for any less than $50,000, he can set a $50,000 opening bid or reserve price regardless of whether that painting is worth $5,000,000 or 50¢.

For online auction sellers, the financial consequences of setting excessive reserves or opening bids are minimal. They typically only lose a few dollars (the listing fee) if an item fails to sell. For buyers on the other hand, estimates, reserves, and opening bids at online auctions should never be used as indications of what items are actually worth. Oceans of sellers are anywhere from overly optimistic to completely deluded about how much their "treasures" are worth. Any potential buyer who doesn't adequately research an item for sale at an online auction (or at any other auction, for that matter) ahead of time and is not absolutely positively sure of what he or she is bidding on should not bid.