Understanding Loan Premiums: Buyer's Guide To Additional Costs

When it comes to purchasing property, both buyers and sellers are responsible for paying closing costs, although the buyer typically pays the majority. These costs are incurred on top of the property's price and include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. One such cost that may be included in the loan is a buyer's premium, which is a fee charged by the auction house in private auctions, typically ranging from 1-5% of the winning bid. It's important to note that not all auctions include a buyer's premium, and it's worth scrutinising any unexpected or large additional costs.

Buyer's premium in real estate auctions

A buyer's premium is a charge levied by the auctioneer or auction house on the winning bid in an auction. The buyer's premium is calculated as a percentage of the winning bid, also known as the hammer price. In real estate auctions, the buyer's premium is added to the hammer price to determine the total purchase price of the property.

The buyer's premium is typically charged in private auctions, where the auction house charges the winning bidder a fee for its services. These fees are used to cover the costs associated with conducting the auction, such as the bidding platform and credit card fees. The actual percentage charged as a buyer's premium depends on the auction house, but it typically ranges from 1% to 5% of the final price. In some cases, the buyer's premium can be as high as 10% or more.

It is important to note that not all auctions charge a buyer's premium. Public auctions, for example, are often run by banks that absorb any agent or attorney fees associated with running the auction. On the other hand, private auctions typically pass these costs on to the buyer in the form of a buyer's premium.

The type of auction and the associated fees can have a significant impact on the final price of the property. While public auctions may not have extra premiums, the properties up for auction may be in poor condition or have hidden liens. On the other hand, private auctions offer more protection but come with the additional cost of the buyer's premium.

In some countries, the buyer's premium may also be subject to taxes. For example, in the United States, most states require sales tax to be calculated on the amount of the premium. Similarly, in Europe, the buyer's premium may be subject to VAT (value-added tax).

Private vs public auctions

A buyer's premium is a fee, usually a percentage of the price, that is added to a sale price to arrive at the total price for the item or property being sold. The buyer's premium is paid by the buyer to the auction house as their fee for running the auction. While the buyer's premium is commonplace, it is not present in all auctions.

There are two types of auctions: public and private. In both types of auctions, anyone can bid, and the highest bidder wins. However, there are some key differences between the two.

Private auctions are run by companies, and they add a buyer's premium to their listings. This premium increases the price by attaching a fee, usually a percentage of the winning bid, to the final price. The percentage varies based on the company but is typically between 1% and 5% of the winning bid. Private auctions offer more protection to the buyer, and the deadline for submitting the final payment is longer than in public auctions. This allows buyers more time to get a loan from a hard money lender or private financer if needed.

In public auctions, on the other hand, the bank usually absorbs any agent or attorney fees, or other costs associated with running the auction. Public auctions may not have extra premiums, but the properties up for auction may be in worse condition, and there may be hidden liens or other issues.

While private auctions offer more protection and time to the buyer, public auctions may be a better option for those who are more experienced in the bidding process and in turning a profit on auctioned properties.

Auction house fees

Commission on Auctions

One of the most common ways auctioneers earn their fees is through a commission. This is typically a percentage of the total sales at the auction, also known as the hammer price. Auctioneers usually charge around 10% to 20% of the gross sales as their commission, but this can vary depending on the auction house and the value of the item. Some auction houses, like Gray's Auctioneers, charge a commission between 20% and 35%. For high-value items, the commission may be negotiated.

Minimum Selling Fee

Some auctioneers set both a commission rate and a minimum fee, allowing them to choose the higher payment between the two. For example, if an auctioneer charges a 10% commission or a minimum fee of $1500, and the auction results in $10,000 in sales, they will charge the $1500 minimum fee.

Buyer’s Premium

In certain auctions, there is an extra cost added to the winning bid, known as the buyer’s premium. This additional fee supplements the auctioneer’s earnings and is usually a percentage of the hammer price. For example, Sotheby's charges a Buyer's Premium of 25% on the hammer price, while MyArtBroker charges 25% on the hammer price plus VAT, making the final price 30% more than the hammer price.

Other Fees

In addition to the commission and buyer's premium, there may be other fees associated with auction houses. These can include:

• Entry fee: A fee charged to list an item at auction, also known as a buy-in fee or minimum. This fee may be charged even if the item does not sell.
• Insurance fees: Charges for insuring the item while it is in the auction house's care.
• Buy-back fee: The amount an auction house charges the consigner if the item does not sell.
• Reservation fee: A fee equal to a percentage of the tax credits requested, typically 8% for for-profit developers and 6% for non-profit developers.
• Deposit: A payment made on the auction day, usually 10% of the sale price.

Percentage of winning bid

The buyer's premium is a charge in addition to the hammer price (the winning bid announced) of an auction item, or lot. The winning bidder is required to pay both the hammer price and the percentage of that price called for by the buyer's premium. The buyer's premium is calculated by taking the buyer's premium as a percentage and multiplying it by the high bid price. For example, if a diamond ring sells for $4900 and a 10% buyer's premium is charged, the buyer's premium alone would be 4900 x 0.10 = $490.

The buyer's premium is charged by the auctioneer in addition to the commission that has always been charged by auction houses to sellers. All of the buyer's premium is retained by the auction house and is not shared with the item's seller. Major auction houses have levied the buyer's premium for several decades, particularly in fine art auctions, with percentages in the region of 10–30%. In real estate auctions in many European countries, the buyer's premium, if charged at all, is much less (2–2.5%).

The modern buyer's premium was introduced at 10% by Christie's and Sotheby's in London in September 1975. Percentages have varied widely, but have risen sharply with time. Early on, Christie's charged 14% in the Netherlands and Belgium, while Sotheby's charged 16% in Switzerland (10% to foreigners), 11% in Monaco and 16% in the Netherlands. There was no fee at Christie's sales in Australia and Sotheby Parke-Bernet auctions in South Africa. Christie's also charged no fees to buyers at its South Kensington house in London and at Edmiston in Glasgow. Christie's introduced a 10% fee to buyers in the United States when it opened at Park Avenue and 59th Street in May 1977. Sotheby's followed in January 1979.

More recently, buyers in London, New York, and France are charged 25% on the first $100,000 (£50,000; €30,000); 20% from $100,000 up to and including $2 million (£50,000 to £1,000,000; €30,000 to €1,200,000) and 12% on the remainder.

Title insurance

There are two types of title insurance policies: a lender's policy and an owner's policy. A lender's title insurance policy protects the lender against problems with the title to the property, such as someone with a legal claim against the home. This policy stays in place until the loan is paid off. An owner's title insurance policy, on the other hand, lasts for as long as the buyer owns the property and protects them from covered title defects that existed prior to the policy date. The responsibility for purchasing owner's title insurance varies by region but is typically paid for by the seller at closing.

The cost of title insurance is typically paid as a one-time fee at the closing of the property purchase or refinancing of the mortgage loan. The amount can vary based on the location of the transaction and the specific terms of the real estate contract. While the mortgage lender usually chooses the title company, title services are often one of the services that can be shopped for on a mortgage loan estimate. The Consumer Financial Protection Bureau (CFPB) recommends homebuyers ask multiple companies for pricing to find the best deal.

In addition to title insurance, there are various other closing costs associated with a property purchase. These include lender fees, home appraisal, home inspection, homeowners insurance, and private mortgage insurance if the down payment is less than 20%. Closing costs typically range from 3% to 6% of the loan amount and can sometimes be negotiated with the seller.

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