When a Rolex Daytona changed hands for nearly $18m last year, it reiterated just how healthy the auction market is. But who can high-end watch collectors turn to in order to finance new acquisitions when they suddenly arise? The answer is collateral lenders and luxury pawn shops, writes Dewey Burke, CEO of Luxury Asset Capital.
There is no magic bullet for acquiring a great watch. You can buy from your favorite retailer, scour the internet, or receive one from a relative, but generally speaking, auctions and private sales are where the most valuable watches are sold.
Last year, a Rolex Daytona owned by Paul Newman went for $17.8m, making it the most expensive wristwatch ever sold publicly. This year, a different Daytona, called ‘The Unicorn’, sold for $5.9m at auction in Geneva, making it the second-most expensive Rolex ever sold at auction.
The Unicorn was expected to sell for $3m but went for nearly double, which speaks to one of the greatest challenges you might face when trying to acquire a dream watch at auction: unpredictability.
Not all great watches come with such a hefty price tag, but it’s fairly common to have a watch at auction go for more than expected. When it happens, many collectors turn to collateral lenders or luxury pawn shops to provide supplementary financing to cover the unexpected difference, often by leveraging the value of other watches or jewelry in their collection.
This approach to financing fine watches continues to grow as the auction market shows no signs of slowing down. The process is very straightforward: a collateral lender provides cash in exchange for a watch(es) it holds as collateral — typically it’s about 60-70% of the item’s fair market value, as determined by a qualified appraiser. For example, a Rolex valued at $170,000 would qualify for a potential loan up to $120,000 loan at an interest rate of about 1.5% per month.
So, why borrow against your existing collection?
Speed is one critical reason. Traditional forms of financing can take six to eight weeks before funds are received, and if you buy a watch at auction, you need to close in a few days or less. Waiting for the bank would cause you to miss out on an ownership opportunity. However, with watch-lending, a collector can borrow against a watch that’s already owned and receive capital in enough time to close the sale.
Also, it’s important to remember that collateral loans are primarily meant to be short-term, as they come with higher interest rates than traditional financing solutions. Some lenders are higher than others, so make sure to do your research, but the average should range from 2-4% per month. Lux Exchange, a US-based luxury financing company that specializes in high-end watches, for example, can be as low as 1.5% per month.
Traditional forms of financing can take six to eight weeks before funds are received, and if you buy a watch at auction, you need to close in a few days or less”
Even with higher interest rates, collectors often find it costlier to miss out on acquiring a watch that will increase in value rather than paying the monthly interest on the loan over the course of a few months.
Another reason it’s gaining popularity among collectors: discretion. There is no public record when borrowing against a watch. The process requires little paperwork, no credit checks, and no individual or business income information.
Borrowing against a watch, or any asset for that matter, should only be utilized if you expect to have the cash flow to cover the loan in a few months. But, if the loan can’t be repaid, the only negative ramification is that you, in effect, end up selling the watch to the lender for the amount you borrowed. In practice, this seldom happens, as asset redemption rates from collateral lenders can be as high as 98%.
Auctions are just one example of where watch-lending has gained popularity, as the service is being used by collectors of all levels. It has helped new owners start collections too, as a first watch can be used to help finance the next purchase.
Dewey Burke is CEO of Luxury Asset Capital, a specialist in serving watch collectors through its online platform Lux Exchange. Its audience is made up of affluent, sophisticated professionals with strong purchasing power who temporarily find themselves illiquid when they see a watch-buying opportunity.