Fair Market Value, Retail Replacement And Auction Estimates
By Mark Prendergast
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As an auction house with many experts in a wide variety of fields, Heritage is frequently approached by individual clients, estate executors and wealth advisors for all types of appraisals and valuations. A general inquiry from a client or advisor for an appraisal of a single piece of tangible property, a collection or an estate must be scrutinized for the actual purpose and need of the situation. Usually, the request for an "appraisal" actually refers just to an evaluation for the potential value of an item through auction or private sale. The person just wants to know how much something is worth. The term "appraisal" is commonly used in referring to any assessment of value of a tangible piece of property. This is correct in most cases; however, in the art and collectibles industry, a true formal "appraisal" is a specific document that requires adherence to IRS dictated regulations, formats and liability agreements, rather than just an opinion of value.
Heritage regularly provides quick and free evaluations of the current market value of art or collectibles. This is in the form of a verbal or written auction estimate — the range of value that one would expect to see the item sell for in today's auction market. This valuation is not intended for use as a formal appraisal or for any purposes of establishing a value for insurance, tax, estate planning, collateral or third party transactions.
Heritage is also able to provide purchase offers in certain categories of collectibles, such as coins, stamps, gold, jewelry, timepieces, comics and silver. The purchase offer is in many ways the truest valuation of an item, as it represents a real and immediate proposal for a monetary amount exchanged for the transfer of ownership of goods. The purchase price offered is usually below the value that one would expect to achieve given the proper time, marketing and venue, but it does not include or require the expenses and fees normally associated with selling through auction or consignment with a dealer. Depending on the circumstances and requirements of the client, an immediate and efficient sale through a purchase offer can be the most beneficial and lucrative means of liquidating property, especially in estate situations were funds are needed quickly.
When a formal written appraisal is required, the next determination is to the purpose and use of that appraisal. Insurance appraisals have different requirements and can represent different values than estate tax or charitable donation appraisals. Appraisals that will be used for tax purposes require the use of fair market values. The IRS defines fair market value 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." IRS Regulation §20.2031-1 While fair market value can be determined using the prices realized at auction — one must take into account any fees associated with the auction sale, such as buyer's premium (as high as 25% at some auction houses — 15% or 19.5% at Heritage). These additional fees must be considered as part of the sale price — and thus fair market value.
The IRS also stipulates that "The fair market value of a particular item of property ... is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate. Thus, in the case of an item of property ...which is generally obtained by the public in the retail market, the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail." 26 C.F.R. §20.2031-1(b) A qualified appraiser should look at the proper and true market for a piece of property to determine how best to establish the fair market value — whether that be at auction or in a retail environment.
A retail replacement cost appraisal is mostly used for insurance purposes and represents the value that one would expect to pay for the same or similar item in a retail setting at the present time. When an insured item needs to be replaced in a timely manner, the retail market is often the only place to do so. With retails prices fluctuating due to locations, sales, marketing, and the economy, one must be cognizant of the specific market and criteria the appraiser used to arrive at the appraised value. The retail price of a work of art by a well known and established artist can vary considerably in locations throughout the country and world. Two paintings of the same size, date of creation, medium and quality can vary in price in a retail setting if the gallery happens to be in New York City, San Francisco or Houston.
An oversimplified — and broadly incorrect — summary of the difference between fair market value and retail replacement cost is the price you can sell something for versus the price you would have to pay for it at retail. Collectors, estate professionals and financial advisors should be very aware that the initial purpose of an appraisal may not translate to subsequent needs and uses. Auction houses and dealers are often approached by clients with insurance retail replacement appraisals expecting to see those values achieved in a sale. In many instances, this is just not possible as the secondary market does not generally attain prices near the retail level. Likewise, individuals may be shocked when an item appraised in a family member's estate is seen in a retail store with a price tag of multiple times the appraised value.
Appraisals and valuations have specific purposes, uses and determinants. An appraiser or Heritage's Appraisal Services can assist with identifying what type of appraisal or valuation is actually needed. Inquiries for appraisals can be found on the Heritage website at www.HA.com/Appraise and auction estimates requests can be made at www.HA.com.