Art appraisal, also known as art valuation, involves comparing data from multiple sources such as art auction houses, private and corporate collectors, curators, art dealer activities, gallerists (gallery owners), experienced consultants, and specialized market analysts to arrive at a value.
Art valuation is accomplished not only for collection, investment, divestment, and financing purposes, but as part of estate valuations, for charitable contributions, for tax planning, insurance, and loan collateral purposes.
Art appraisers charge an hourly fee for their services, in lieu of a percentage of determined value from the appraisal, to remain within USPAP and IRS ethics codes.
The Professional Art Appraisal: What to Expect
Excerpts from an article by Randolph E. Osman
Almost everybody owns works of art. If you own a work of art, you probably need an appraisal. If for no other reason (sale, charitable contribution, inheritance tax, estate distribution), you need to give your insurance company a certified document by an accredited appraiser, specifying that you own such-and-such work of art, on a certain date, examined, described in detail, confirmed on a certain date, and valued at a specific amount. Such a document will assure that you will receive reimbursement at the appropriate value in case of a future loss.
An appraisal is a legal document; it is as important as a will. It is the only way to accurately describe the value of your artwork. A properly prepared appraisal by a qualified appraiser will clarify questions of value under all circumstances.
There are several different types of appraisals employing different types of value, and each one serves a specific need. Mixing them up or confusing one for another can lead to serious legal and economic consequences for the unwary consumer. An accredited appraiser will know the difference between Fair Market Value and Replacement Value and Marketable Cash Value. He/she will know how to determine each one, and which one is appropriate to a specific appraisal assignment. If your appraiser cannot talk intelligently about these types of value and cannot describe the research method used to determine these values, then you might want to consider looking for one who can.
Unlike refrigerators, automobiles, stereos and commercial furniture, it is often hard to place a dollar-and-cent value on artwork. Doing so involves research and calculation and documentation. This is the nuts and bolts of the appraisal profession. The value of an artwork or antique is rarely what you paid for it when you bought it. The appropriate value of a work of art is rarely what the seller’s “certificate of authenticity and value” says it is worth. Estimating Fair Market Value or Replacement Value for one-of-a-kind works of art (by definition, they are irreplaceable!) is difficult and complex. That’s why you hire a certified, accredited appraiser. Hire an appraiser who has been trained, tested, and certified through peer review by a respected national appraisal organization. There was a time when the value of a painting or sculpture, like the value of art itself, was believed to be "in the eye of the beholder". That is no longer the case. The appraiser has to translate the appreciation for art into dollars and cents. The appraiser has to be able to defend his value conclusion in writing and often in a court of law, before the rigors of Internal Revenue Service investigators, and attorneys representing a contrary view.
One of the key topics of appraisal certification by national organizations involves ethics. Certified appraisers have to take and pass an ethics exam. Uniform Standards of Professional Appraisal Practice spends several pages on ethics. Accredited appraisers are rigorously coached in adhering to ethical standards. The reason is obvious. If I tell you your painting is worth $500 and I buy it from you for $600. You are delighted. If I sell it for $6,000 you may never know. For this reason, appraisers who also buy and sell works of art they appraise have an inherent, built-in conflict of interest. An appraisal is an objective opinion, based on specified research criteria.
HOW APPRAISERS DETERMINE THE VALUES THEY ASSIGN TO WORKS OF ART:
The appraisal methodology for Personal Property, including works of art, is not so different from that used to determine the value of real property. It is based on careful examination of the property in question.
Everything is examined, studied, analyzed, described in writing. Such considerations as style, condition, previous ownership, authorship, subject matter, size, authenticity, all play a role in assigning a value. Once the appraiser knows exactly what he/has, he/she can determine which of many is the appropriate marketplace for the subject property. Then he/she can consult that market to determine if the subject artwork has ever sold. The appraiser also looks for comparable works that have sold recently. He/she adjusts values of the comparables to compensate for differences between his subject piece and the comparable he is evaluating. Such things as quality, size, date, subject matter, complexity may all be different.
During this process of identifying and analyzing comparable sales, the appraiser may consult experts, or art historians specializing in a particular period or style. He/she may ask questions of museum curators, commercial gallery personnel, auctioneers, artists, and technicians such as employees in bronze foundries, printing shops, architects and graphic designers. Sometimes there may need to be a technical analysis of paint or canvas, or infrared or ultraviolet light examination to assist with determining condition or authorship. Sometimes ex-ray is necessary to answer questions that affect value. For some works of art, the appraiser will consult the Art Loss Registry and other databases to try to determine if the work was stolen.
After deciding what kinds of questions to ask and what market to consult, the appraiser will perform the research and will gather data to guide in estimating what the subject work of art would sell for in the appropriate market at a given date. The appraiser will consider levels of taste, availability of like objects, rarity, cost of cleaning or repair if needed, and the history of sales of close comparables. He/she will summarize these findings in a narrative that will serve as a convincing argument to defend his assigned value for that particular work of art.
In sum, “the appraisal process” calls for due diligence and considerable skill in carefully examining the subject work of art, properly identifying the work of art (author, style, medium, support, date, quality), then determining which of many is the “relevant market”, selecting appropriate comparables, analyzing the subject work of art and the comparables, adjusting for differences between the two, drawing value conclusions from these analyses, and writing a convincing narrative to defend the conclusion in a report that conforms to USPAP guidelines.
Artist Paul Travis, 1891-1975, a notable and historic artist important to the Cleveland Museum of Art. JJM Creative is currently working with the Travis family to valuate his collection.
DIFFERENT TYPES OF VALUE:
There are two types of value in common use by art appraisers, Fair Market Value and Replacement Value. Another type often used is called Marketable Cash Value. There are other types of value as well, (liquidation value, actual cash value, etc.) which are rarely used in fine art appraisals.
Fair Market Value is required by the IRS (for charitable contributions and inheritance tax), and is the norm or opposite value employed in the banking industry, and by the IRS Fair Market Value is a legal term (defined in Black’s Law Dictionary) and defined by the courts. The ASA Personal Property handbook defines it as:
”the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”
Other definitions of FMV specify that no time constraint is imposed on the sale and that the appropriate and relevant marketplace for the artwork be employed.
Fair Market value is a hypothetical value, yet is the value that sophisticated people will agree to trade on. It is not necessarily wholesale or retail value, but it could be. What matters in setting Fair Market Value by professional fine arts appraisers is what a person with the money is willing to pay for the artwork when he or she knows all the facts about it and is under no pressure to buy or sell. In other words, what a willing buyer is willing to pay a willing seller.
Replacement Value is primarily used for insurance appraisals. It is “the price in terms of cash or other precisely revealed terms that would be required to replace a property with another of similar age, quality, origin, appearance, and condition within a reasonable length of time in an appropriate and relevant market.”
Replacement Value is the amount of money that an owner will charge for the desired item on short notice. It is usually a high-end retail value. There is usually a very great distance between FMV and RV, two important value types in the world of personal property appraisal. It is important to distinguish between them and to have the skills to do that in a written report.
Paintings and sculptures are often one-of-a-kind items and are not replaceable from a cache of exact replicas in a manufacturer's catalog or warehouse. So "replacement value" has to be based on the current retail value of some very similar work of art. That is where the expertise of the accredited appraiser comes in. The appraiser must understand the artist, the style, and the relevant market in order to determine appropriate comparable works of art for use in calculating a replacement value for the one being appraised. The appraiser must be able to identify the relevant market. The local Good Will store is not the same market as Sotheby’s international. A local auction in rural Kentucky is not the relevant market for a cutting edge avant-garde drawing. The appraiser must have the education and experience to determine the appropriate market place for a specified item. He must also have access to the many databases of sale information from which to examine the thousands of sales that occur annually.
WHAT IS "A QUALIFIED PROFESSIONAL APPRAISER":
In my experience, QPAs working in fine art are often ex-museum curators, former gallery owners, and university faculty. They are often highly educated art historians, with years of research, publication, travel and commercial gallery experience who prefer to be on their own, as independent contractors. Some also teach and/or broker fine arts. Most belong to one of three professional accrediting organizations, which administer examinations and require their members to adhere to strict ethical codes and regularly require re-certifying exams in specific fields. You find QPAs, by calling the best professional appraisal organizations to locate the appropriate appraiser in your area. Here's a list of some of the best appraisal organizations, which test and accredit personal property appraisers:
AMERICAN SOCIETY OF APPRAISERS (ASA)
P.O. Box 17265
Washington, DC 20041
Phone: (703) 478-2228
ELEMENTS OF A CERTIFIED PROFESSIONAL APPRAISAL:
A written appraisal report should follow specific guidelines, based on USPAP...
It should include a letter of transmittal, which outlines the appraisal assignment, the scope of the job and the valuation approach used.
Also included should be a statement of purpose conveying the intended use of the report and the objective or type of value to be determined (e.g. retail replacement value for insurance appraisals; fair-market value for charitable contributions, estate tax valuation of property, etc.)
A clear definition of the type of value used, and a market narrative for the type of art being appraised should follow this.
Also, look for a list of limiting conditions and liabilities that might affect the valuation.
In order to be acceptable to the Internal Revenue Service, hold up in court, and have sufficient creditability to stand on its merits, a fine art appraisal report must contain certain pieces of information. These are well described in Internal Revenue Service publications (see IRS Publication 561 -Determining the Value of Donated Property) and in literature published by the American Society of Appraisers.