Definition
A buyer’s premium is an additional fee charged by auction houses to the successful bidder on top of the hammer price. This fee is typically calculated as a percentage of the winning bid and represents part of the auction house’s revenue model. Buyer’s premiums commonly range from 10% to 30% depending on the auction house, lot value, and asset category.
Significance in Alternative Asset Valuation
Buyer’s premiums significantly impact the true cost basis and fair market value calculations for alternative assets. When establishing valuations for insurance, estate planning, or portfolio management purposes, appraisers must consider whether to include or exclude buyer’s premiums based on the valuation context.
For insurance valuations, the replacement cost should typically include buyer’s premiums since acquiring a comparable item would require paying these fees. However, for estate tax purposes, the IRS generally considers fair market value to be the hammer price without buyer’s premiums, as this represents what a willing seller would receive.
The variability of buyer’s premium structures across different auction houses and market segments also affects comparable sales analysis. A painting that sold for $100,000 hammer price with a 25% buyer’s premium represents a $125,000 total acquisition cost to the buyer, which impacts how that sale should be weighted in valuation models.
How Impossival Approaches This
Our valuation models account for buyer’s premiums by maintaining separate data fields for hammer prices and total buyer costs in our auction database. We apply context-appropriate adjustments based on the valuation purpose—including premiums for replacement cost scenarios while focusing on hammer prices for fair market value determinations.
Related Concepts
• Hammer Price - The winning bid amount before additional fees • Auction Value - Total market value derived from auction sales • Fair Market Value - Standard of value for tax and legal purposes • Comparable Sales - Recent transaction data used in valuation analysis