Suppose someone offers you a work of art for "investment," tells you it's been appraised at a certain dollar value, and that's how much they're selling it for. If you're like most people, you're inclined to believe that since the art's been appraised or has had a formal valuation, that the appraised value is what the art is worth. This is not necessarily the case; art appraisals may or may not have any relation to the art's fair market value, meaning its documentable dollar value on the open market, meaning the amount of money a willing buyer could reasonably be expected to sell the art for to a willing seller, neither party being subject to undue influences-- or in other words, meaning what informed knowledgeable collectors generally prefer to pay for their art. In order to pay a fair price, you have to know how to appraise the appraisal, especially if you're approached as an investor or are asked to invest in art on either a short or long term basis.
To begin with, anyone selling art naturally wants to sell it for as much as possible. If a seller thinks that getting the art appraised will help sell it, then he or she will want that appraisal to be high rather than low. In other words, an appraisal that seller shows you may possibly be for as much money as that seller has been able to encourage an appraiser to state. Or maybe the seller has shown the art to several appraisers, and hired the appraiser who gave the highest value.
Whenever a seller tells you his art's been appraised, the first thing you want do is see the appraisal. Sometimes the seller tells you that he doesn't have an actual appraisal, but rather that an appraiser looked at the art and gave a dollar value. THIS IS NOT AN APPRAISAL. Sometimes a seller tells you that he hasn't had the art formally appraised, but that his asking price is what the art sells for at galleries. THIS IS NOT AN APPRAISAL EITHER. No physical appraisal document that you can hold in your hands and read means that the seller does not have an appraisal.
In all cases where the seller has an appraisal, get it and read it. Pay particular attention to the purpose of the appraisal and also to the name and qualifications of the appraiser. The appraiser should have experience appraising art, be qualified to appraise art, and have no conflicts of interest regarding the particular work of art that's been appraised. The appraisal should contain contact information for the appraiser, a conflict of interest disclaimer, and also a statement of how the appraised value was determined.
For example, if the "appraiser" turns out to be a dealer or gallery owner who either represents the artist or sells that type of art, then in the great majority of cases, you're getting a full gallery retail "appraisal" which is not an appraisal at all. Retail value is the highest price that a work of art sells for under any circumstances, not necessarily what you should be paying for it from a private party in a resale transaction. Gallery owners, gallery employees, or anyone else directly or indirectly affiliated with the art or artist have conflicts of interest regarding valuing that art and are inclined to value or "appraise" high. Their "appraisals" are almost always irrelevant for your purposes.
A similarly irrelevant appraisal is one that's been done for insurance purposes. Insurance value is the amount of money that an insurance company is asked to pay out if a work of art is severely damaged, stolen, or destroyed. That dollar amount is normally full retail plus additional expenses that may be incurred in order to repair or replace the art with an exact or approximate duplicate. An insurance appraisal normally states a value higher than the retail price that the art sells for at a gallery.
You want a FAIR MARKET VALUE appraisal, a dollar amount that a willing buyer pays a willing seller under normal circumstances, or would reasonably be expected to pay under normal circumstances (neither being unduly influenced in any way), not in the controlled environment of a gallery, not in the amount of a potential insurance claim. For example, a painting priced at $3,000 in a gallery may have a fair market value of as little as several hundred dollars on the open market-- hard to believe, but true!
THE PRICE THAT SIMILAR WORKS OF ART SELL FOR AT AUCTION IS GENERALLY ACCEPTED TO BE AN ACCURATE ESTIMATE OF FAIR MARKET VALUE, assuming the auction is reasonably well-publicized and that bidders familiar with the art being auctioned are in attendance. At auction, art is generally required to sell immediately, with no fanfare or restrictions, to the highest bidders. Another good estimate of fair market value is the price that a retail gallery pays for a work of art BEFORE they mark it up. This "dealer price" is considered to be the WHOLESALE VALUE of the art, and is generally considered a reasonable indicator of a work of art's fair market value.
A private party selling art has no reason to charge art gallery prices; that person has none of the expenses associated with owning and operating a gallery-- expenses that galleries normally price into their art when they sell it. Pay a "fair market value" price for any art that you buy from private parties. That price should be as close to the wholesale price, dealer price, or auction value of that art as possible.
Additional tips for evaluating appraisals or selling prices:
* The amount of money that a seller originally paid for art has no bearing on that art's fair market value. Sellers overpay for art all the time and you, as a buyer, are not required to compensate them for their mistakes.
* A work of art that's appraised at $5,000, for example, but that's priced for sale at $2,500, is not necessarily a bargain. As stated above, a retail or insurance appraisal can be for many times the fair market value of a work of art. Always determine fair market value first, no matter how big a bargain the seller makes you think you're getting.
* Make sure any appraisal you are given is current and has been done within the past three years or so. Art prices fluctuate over time. An appraisal dating from the art boom of the late 1980's, for instance, can easily state a dollar amount far beyond what the art currently sells for.
Source : www.artbusiness.com
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