Tuesday, April 28, 2009

Private sales of artworks, in a down market

Auctions are good for price discovery, and price discovery is particularly important for "common value" goods, i.e. goods whose value to each buyer may be substantially influenced by what other buyers are willing to pay. So, what should you do if you want to unload a common value asset but want to avoid disseminating potentially bad news about what it might be worth? The NY Times reports More Artworks Sell in Private in Slowdown .

"During good times, an auction is the obvious choice for any collector wanting to sell a work of art. But as the recession takes its toll, many collectors have changed strategies and retreated to the more hidden, and potentially less lucrative, world of private sales.
"For many sellers, the driving factor is fear. Fear that their friends will discover they need money. Fear that if a Picasso or Warhol, Monet or Modigliani does not sell at auction, it will be considered yesterday’s goods.
If they do not have to, fewer collectors are putting their holdings up for auction at Sotheby’s and Christie’s, where prices and profits have plummeted. But executives at both houses say business in their private-sale departments has more than doubled in recent months. "
" “The game has definitely shifted,” said Christopher Eykyn, a former head of Impressionist and modern art at Christie’s who is now a dealer in New York. “A lot of clients don’t want to be seen selling, so the private route is suddenly more attractive.” "
"There are exceptions, of course. Estates continue to go to auction because executors have a fiduciary responsibility and prices are rarely challenged after public sales.
For the auction houses, private sales are lucrative and inexpensive. Generally Sotheby’s and Christie’s charge 5 to 10 percent of the purchase price of an artwork, depending on its value and the agreement with the seller. (If a work goes to auction the houses charge sellers 25 percent of the first $50,000, 20 percent of the next $50,000 to $1 million and 12 percent of the rest.) Money earned from private transactions comes cheap, without expenses like advertising, insurance and shipping associated with auctions.
The dismal sales in New York in November, when night after night paintings by Monet and Matisse, Bacon and Warhol went unsold, meant big losses for Sotheby’s and Christie’s, which had a financial interest in most of this expensive art in the form of guarantees, undisclosed sums paid to sellers regardless of a sale’s outcome.
After the fall auctions, both houses immediately began changing the way they conduct business. In addition to announcing hundreds of layoffs, with perhaps more to come, they mostly halted the practice of guarantees and stopped giving consignors a cut in the fees they charge buyers. The days of publishing luscious catalogs have ended as well.
For their part, dealers say that their phones started ringing after Sept. 15, the day Lehman Brothers filed for bankruptcy. “It’s been pretty steady ever since,” said Steven P. Henry, director of the Paula Cooper Gallery in Chelsea. He said he had been getting inquiries about selling art from people who had investments with Bernard L. Madoff, or who had seen the value of their stock or real estate assets collapse."

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