Perils and Pitfalls of Auction Buying

With paintings commonly fetching over $100 million at auction, buyers should be aware of auction pitfalls before they bid.

Auctioned property sold “as is” usually means merchandise does not come with any warranty, guarantee, authentication, or representation (expressed or implied). What you buy is what you get. But there are many other things that occur on bidding floors that you should know about.

Illegal shill bidding allows consignors to bid on their own pieces placed in auction, so the sale price will be driven higher. It also is illegal for auctioneers to pretend phone bids are taking place, to see someone bid who is not in the audience (the phantom or “air” bid), or to accept any form of in-house bidding used as a scheme to run up a final price, but these common practices are difficult to police.

When a group decides to sell items at an auction house or on an Internet site and they bid on each others consignments, it is called cross bidding. If anyone in the group is stuck purchasing an item, the group member that owns it will buy it back.

As group members bid on each others items, potential buyers see the activity, start bidding and prices go up. People think an item is extremely valuable when a lot of bids are placed on it. They have no idea cross bidding is taking place. When an outsider bids a high price, the cross bidding abruptly stops.

Some Internet auction sites get over 1,100 bids per minute and the government does not have enough employees to scrutinize all illegal cyberspace activities that escalate prices and dupe the public.

Illegal “puffing” is similar to shill bidding. Sellers escalate (puff) auction prices by getting others to bid on their items. Puffing also takes place when a group of dealers bids against a wealthy buyer to bring bidding to a certain high level before they drop out.

Dealers puff sales when they do not want their clients to get items for too low an auction price or when they own an item at auction. Auctioneers often allow puffing because it helps bring in more revenue. It is a vicious circle.

“Chilling” is when a group attempts to stop an audience from bidding on a certain item so it will sell for a low or depressed price. This occurs when one group member wants to buy an item and the rest of the group remains mute, or when a group wants to taint a competitor’s promotion of a certain artist. Both puffing and chilling are fraudulent because they prevent or distort fair trade practices.

It is illegal to bid at auction as a member of an art ring. Art ring members premeditate amongst themselves who among them will or will not bid on specific auction items. Art rings keep hammer prices low (chilling) or high (puffing). A ring’s controlling actions falsify or depress a market, diminish buyer confidence and often lessen a consignor’s and auction-houses income.

Court cases have proven rings conspire to restrain and hype trade for self-serving financial benefit. If an art ring’s designated bidder successfully purchases an auction item, a second private “ring auction” takes place. Each ring member writes on a piece of paper what he or she is willing to pay for an item that one group member bought below market value.

If there are four people in the ring, three people will lose the ring bid and be paid by the ring’s top bidder a share of the difference between the real auction price and the ring’s top bid. In other words, if a painting sold at auction for $10,000 (including buyer’s premium) and the top bid in the “ring auction” is $22,000, the difference is $12,000. The person who is willing to pay $22,000 for the item gives $4000 to each of the other 3 ring members in undeclared cash (a total of $12,000).

Proving puffing, chilling or art ring manipulation is hard to do, because auctioneers allow it and deny it occurs.

Before an auction, those who want to bid register with an auction-house and are given a number that usually is printed on a bidding paddle or white card. When a bidder is successful, the paddle or card is raised so that the auctioneer can see it and report the number to a staff member. After an auction ends, the successful bidder returns the paddle to the auction-house and pays for items.

Those who are excited when they bid at auction often forget they have to pay a buyer’s premium of up to 25 percent on successful bids. That percentage is over and beyond an item’s hammer price.

An auctioneer accepts bids from those seated or standing in the room where an auction takes place and acknowledges telephone, e-commerce and pre-auction absentee bids. An auctioneer has to honor the highest bid if it reaches an item’s reserve or the lowest price-estimate printed in a sale catalog.

Auctioneers are trained to see the smallest movements people make in a salesroom. Those who do not want others to know they are bidding have numerous ways to bid without detection. A slight nod of a head (or a wag of a finger held close to the chest) catches an auctioneer’s attention. Be careful not to stroke hair, scratch a forehead or nod during an auction. It might be construed as a bid.

Before bidding at any auction, determine what your highest bid will be and don’t let the excitement of the moment cause you to go higher!

Patricia Jobe Pierce is a freelance writer, art historian, art dealer-consultant, certified AAA appraiser, public speaker, photographer and American art authenticator for museums, auction houses and collectors. She graduated from Boston University with a BFA in 1965, is owner and director of Pierce Galleries, Inc. in Nantucket and Hingham, Mass., and is author of many works, including, "Art Collecting & Investing: The Inner Workings and the Underbelly of the Art World." For more of her submissions, Click Here Now.