At Meural, we're driven by art democratization and transparency—and so we've developed a series at the intersection of art and commerce. Each installment provides an objective, accessible debriefing of a financial aspect of the art industry. Read more about the series' objective and what's to come.

by Elinor Case-Pethica

Sotheby’s and Christie’s stopped giving guarantees in late 2008, after Sotheby’s lost $52 million in unfulfilled guarantees in the course of just one season. The practice of offering guarantees is now back in full swing—but what are ‘guarantees’ in auction houses? How do they affect price?

A guarantee is a promise from the auction house to the seller that the house will pay a certain amount if the bidding does not surpass that point. If the guarantee is met in auction, then the house collects a percentage of the margin—between 10-50%, typically 25%. The guarantee is a failsafe for consignors, and the fee is compensation to the house for taking on risk. In this way, guarantees are essentially auction houses betting on how well their specialists can predict the market.

Guarantees represent risk to the house for several reasons. Once a guarantee is offered, the house is responsible for shelling out if things go poorly in the auction. If a scenario arose where the market crashed after the house offered a series of guarantees, it could leave the house owing millions and owning artworks they don’t want.

Dan Colen’s Holy Shit and Andy Warhol’s Liz #1 (Early Colored Liz) at Sotheby’s

The offer of a high guarantee can be a useful tool for winning consignments. A high guarantee is an appealing draw for sellers, and auction houses will ‘bid’ over consignments with competing guarantee offers.

When the guarantee is placed too high and the bidding fails to reach it, it may seem like an obvious loss for the house—they pay the agreed upon amount after essentially proving in auction that the piece isn’t worth that price. However, there are many other hidden benefits to winning a big consignment, even if the auction house does not get a cut of the sales price. Having a major piece up for auction attracts attention, meaning a greater number of bidders and increased visibility for the lesser works up for auction. Prices of those more minor works look reasonable next to the hefty price of a master work.

Outside guarantors are one way auction houses can export some of the risk involved in offering guarantees. A third party ‘outside guarantor’ will privately approach the house with an offer—essentially a private pre-bid. This bid works as a guarantee to the house and seller, a promise of a baseline price that they will achieve regardless of how the actual auction goes. If bidding is slow and never reaches the number suggested by the third-party guarantor, they are the high bidder and purchase the work. If bidding goes above that guarantee number however, the guarantor receives a percentage of the sale price.

The now-common practice of outside guarantees is for the most part unobtrusive to bidders, but has nonetheless raised some complaints. Some feel that allowing the guarantor to bid on the piece they offered a guarantee on enables them to drive prices higher than they otherwise would go, to increase their winnings once the guarantee has been surpassed.

Pieces being auctioned with a guarantee are marked with a small symbol in the auction catalogue, but the amount of the guarantee is not disclosed.

Others complain that guarantees take all the mystery and excitement out of the auction—that half the pieces are sold before the auction room even fills. In some ways this is true, but it perhaps is more useful to think of it as a shift of the same practices to a different scale. Bidding is still taking place, but now it happens before the auction.