Auction estimates serve two purposes in a perfect world. The first thing an estimate does is that it helps speed up the auction. Imagine if a ten million dollar painting started at $1. It might take ten minutes of bidding just to get past one million dollars. A good auction house uses an estimate to help speed up the auction. The second thing a good estimate does is it helps the uninformed bidder get an idea of what something should cost. For example, there was a time when an 1899 $1 black eagle graded as a 66 was worth $1,000. The auction estimate might be $800 to $1,200. If you got it for $800 then you got a great price. If you paid $1,200 then you probably paid the full boat retail price and then some. Sadly, auction houses often don’t take the time saving or informational approach. They use estimates to either attract bidders or attract consignors.
So how can you attract bidders with just an auction estimate? It is easy. Take the same $1,000 example above. If you want to attract bidders then you might estimate the note at $200 to $300. Despite knowing it is too good to be true, there will be dozens of people lining up thinking they are going to buy the note for a 75% discount because the estimate is low. Of course the note will actually probably sell for $1,000, which is what is was worth the whole time no matter what the estimate was. This also serves the auction house in another way. After the sale is over then they can tout that they sold something estimated at $200-$300 for $1,000. They will take the credit for the premium even though it just sold for the true market price.
For every one time we see the purposely low estimate, we see another 100 purposely high estimates. The difference between a dealer and auction house is that a dealer competes on price and an auction house competes on estimates. Imagine if you wanted to get a quote on a landscaping job at your home. One worker tells you it will cost $750 for the job. Another company tells you it will probably cost $400 to $600, but they will do the work and then let you know the total. Most people will probably go with the company who gave the lower range. The only problem is that after the work gets done and you get a bill for $1,000 you don’t have much recourse. Only then do you realize you should have taken the $750 proposal. Auction houses do the exact same thing, just reverse the situations. They give you a really appealing pitch and once reality hits it is too late to do anything about it.
Let’s once again look at the 1899 $1 bill. The auction house knows that nine times out of ten the note will sell for $1,000. A dealer would gladly pay $950 for such an item. The auction house takes 25% from the final price. So when it sells for $1,000 like it should, the seller actually only gets $750. No one in his right mind would take that deal. So what does the auction house do to combat their problem? It is simple, they just inflate the estimate.
Instead of giving you a real estimate like $800 to $1,200 they will tell you an estimate of $1,500 to $2,500. The consignor feels warm and fuzzy because he is thinking he avoided the dealer who was low-balling him at $950 and now he is about to get at least twice as much money. However, no matter what the estimate is, everyone who collects currency knows that an 1899 $1 note is only worth $1,000, so no one will pay more than that. The note goes to auction, opens for $900, probably hammers for $1,000, and the seller gets his check for $750, and the auction house gets their check for $250. It really is a great deal for the auction house. They make the seller take all the risk and the auction house gets its cut no matter what. The absolute worst part about the high estimate is that it deters people from bidding. Dealers and collectors realize that the auction house is playing an estimate game. So sometimes the item won’t even sell at all. So the seller sent something in to an auction, waited 4 months for it to hit the block, everyone passed, and two months later they get their note mailed back to them with a bill for grading, insurance, and photography. It is amazing how greed will make people do strange things. It was greedy of the auction house to try to falsely misrepresent the value of the currency with a high estimate. It was also greedy of the seller to think he or she was going to get two or three times more at auction. It just doesn’t work like that. Most dealers work on 5-15% margins.
If you are looking to sell something then it never hurts to take two or three offers and at least have a conversation with an auction house. Just remember that an auction house probably stands to make more money than anyone else. Their valuation can be extremely biased and the seller is still taking a huge risk at auction.