Appraisal Methodology

Appraisal Methodology

Insurance valuation (Retail Replacement Value)

Insurance is intended to compensate you in the event of damage or loss. Insurance appraisals assess the current Retail Replacement Value (RRV) of the artwork you own.  RRV is defined as “the highest in terms of cash that would be required to replace property with another of similar age, quality, origin, appearance, provenance and condition, within a reasonable length of time in an appropriate and relevant market.” More often than not, the artist’s gallery prices reflect top of the market values used for insurance.  That said, it’s often worthwhile to look at auction results, for reason that, on occasion, realized prices at auction can eclipse gallery prices; in some instances, auction results can be better gauge for RRV for particular artists or specific artworks.

*RRV can also be the basis of value for a Loss Appraisal.

Donation valuation and Estate valuation for the IRS (Fair Market Value)

Many people have an idea of what Fair Market Value (FMV) refers to but it’s not as concrete as it sounds.  The IRS has defined FMV as “… the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.” (IRS Publication 561)

When it comes to the valuation of art for donation or for an estate tax filing, many people assume that FMV is defined by the auction market (which is a secondary market). This is correct for some artists and their work, but not all.  In clarifying the definition, the Appraisers Foundation in Washington, D.C., adds that FMV should also be determined by the most appropriate market for the property, and, for our purposes, the market where the artist’s work is most commonly traded.  For contemporary artists who are represented by a gallery, and have little or no history of sales at auction, the most appropriate marketplace for their work is generally retail (i.e., gallery pricing).  Another example would be artists who normally (or exclusively) sell their work out of their studio or via a website—for these artists, it’s the studio or web prices that would determine their FMV.

The key point to remember is that FMV is reflective of the prices realized in the marketplace where an artist’s work is most commonly traded.

Marketable Cash Value for Divorce & Dissolution appraisals

Appraisals prepared for divorce proceedings or for dissolution purposes are essentially about ensuring equitable distribution of property between the parties.  As such, Marketable Cash Value (MCV) is the valuation used for these types of appraisals and is defined as “the anticipated net proceeds (or cash in hand) that would be yielded from the orderly sale of a property once all costs of sale were subtracted.” Essentially, if you sold it, what would you likely net after commissions and fees, whether you sold it through a gallery, at an auction house, or by way of an appropriate online platform.

Other types of appraisals that utilized the aforementioned methodologies include those needed for Damage &/or Loss situations (if the artwork needs to be reassessed after conservation treatment &/or the appraiser needs to provide a valuation in retrospect—at the time of loss—if the client’s insurance hadn’t been updated in a while), Collateral Loans and Resale.