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art collections appraisals

The Art Market

by: Joe Cornell, ASA, CMA, ISA

all rights reserved 


Art appraising is the process of estimating the potential value of works of art. The appraiser finds for many different kinds of value relative to the valuation of different items, e.g., replacement value, fair market value, actual cash value, etc. the actual appraising of different pieces of art involves comparing statistical information from a multiplicity of sources, including but not limited to, collectors, art dealers, curators, auction houses, art market analysts, etc. The reasons why people have art appraised are many, including but not limited to, charitable contributions, resale, insurance, estate purposes, divorces, lending decisions, etc.

Some of the considerations that are involved in the appraising of art are: the investigation of primary and secondary markets, barriers that exist within each market, transparency issues, the size of the market for an individual piece, and market timing in terms of the ups and downs of a specific art market, etc. In appraising art there are some specific things that have to be considered, including but not limited to: the liquidity of buyers and sellers, trends both inside and outside the art market, general appraising factors, the availability of research data on a specific item, market demand for a specific artist’s work, and the supply of art similar to that being appraised, etc.

In the United States, art that is bought and sold by collectors is treated as a capital asset for purposes of taxation, and argues against relating to the appraisal of art and/or the nature of the specific gain on the sale of art and argues that its value/sale is usually decided by the US Tax Court, but is also sometimes decided by other courts of competent jurisdiction. It should be noted, that appraisers estimate the value of a specific piece of art, while only a court of competent jurisdiction can set the value of a specific piece of art. There are many important legal cases involving art and its valuation. Some of these are as follows: Angell verse the Commissioner, which deals with fraud involving inflated appraisal valuations, Drummond verse the Commissioner, which deals with the issue of not being able to claim gain from art sales as income from business unless one is actually in the business of selling art, Crispo verse the Commissioner, which deals with the necessity of being able to produce credible documentary evidence of valuation, which is the taxpayer’s ultimate burden, The Estate of Robert Scull verse the Commissioner, which deals with the fact that previous sales of the same or very similar property without subsequent events affecting value are generally considered to be strong indicators of fair market value, Nataros verse The Fine Arts Gallery of Scottsdale, which states that if there is an absence of negligent misrepresentation or fraud, buyers thinking they have been overcharged at auction, because of bad advice, bear a very heavy burden of proof, Williford verse the Commissioner, establishes what is known as the “Williford Factors” test: deals with the eight factors in involved in determining whether a specific property is being held for investment or held for sale.

In the art world there are those who create art and the patrons, who enable the production of art. It is the latter of these two, who historically drive the value of art. It is this relationship that has made for the fact that art has become commercialized, and has created a culture that surrounds the artist as well as the art patron. There is no question that art has become a business and that this business is driven by the fact that money can be made by those who are involved in the commercialization/sale of art. Art has never been nor will it ever be, totally free of money; to a very large degree it has now become dependent upon money. The art culture has become pervasively, almost entirely, dependent upon money and influenced by money. Money informs art as to what the art world should be producing, if that world wants/expects money to pour into its coffers. Money in some ways tends to seduce the art world into giving up its higher values by subverting and reversing the perceived idea that art is and should be superior to money.

There is no question that for many involved in the art culture, certainly for the patrons, there is an emotional connection between themselves and the art they care about. This emotionality extends itself from the patrons into the art culture itself, and this confluence helps propel the value of art both up and down. This emotion is non-economic, but is nevertheless very real, and has terrific impact on the art market’s ups and downs, because it is these emotions which can be very heavy factors involved in the purchase or non–purchase of a particular piece of art.

Art markets move up and down; they are cyclical. It has been observed that to some degree the art market sometimes peaks in the spring and autumn and withdraws, somewhat, in late fall and winter. Sales that occur privately, and are not a part of published auction results, do not affect the art market itself until such sales become public. There is no question that the art market is somewhat volatile. In some ways, but not always, the direction of the art market is predicated on the movement of the stock market. This is because an art patron’s financial fortunes are heavily affected by the financial markets and the attitude as well as the financial health of a particular buyer is often times very affected by the successes or failures relative to his personal or business finances. Also, art markets are very often affected by transient fashion and trends within the art market itself. Sometimes one type of art is more fashionable to purchase than at other times. This affects value.

There is no question that the art market lacks transparency, and there is no question that there is a perceived lack of ethical behavior amongst many of those who regularly participate in the art market. There have been many questions about whether or not the art market is less ethical than the stock market. It is this Appraiser’s opinion that in fact the art market is less ethical than the stock market. An example of this is often times auctioneers, hoping to raise the price of a particular piece of art at auction, will create bids out of thin air, which actually do not exist, or will use unidentified bidders to continue the bidding on a particular item and thus raise the supposed realized price of that item by falsely representing buying/acquisition interest in that item. Also, it is a well-known fact that often times galleries, who represents specific artists, will inflate the the price they say they have received for a specific artist’s work in order to support future sales of that artist’s work. These problems, and others, make the valuation of art particularly difficult when researching an item’s value using auction sales results. There are so many easily observable problems in the art market that the New York Times blogger, William D Cohan, offers the following: ……. “there is still a need for some serious introspection among those who buy and sell art about putting an end to the questionable behavior of some dealers. And if that means that the art market needs to fall under the purview of the Federal Reserve at the newly created Bureau of Consumer Financial Protection — which of course no one in the art market will like —- then so be it.”

Art appraising is particularly difficult because it is involved in the juggling of many subjective factors, e.g., estimate of the liquidity of specific markets at a specific time, general market demand or specific demand for an artist’s work, the provenance of the piece of art being appraised, the condition of a specific piece of art being appraised, trends such as average sales, and the interpretation of prices found on a specific artist’s work when there is a lack of data about the prices realized from actual sales, confusions created by “bought-in” works, which are items, at auction, that are returned to an owner, which did not bring the amount set by the owner for it sale, or which has been passed-over, with drawn from the auction, or for reason remains unsold.

In researching the prices actually achieved for an artist’s work, the appraiser has to deal with many problems, often times insurmountable, e.g., data relative to the actual sale of specific works very rarely deal with the condition of the piece of art, its framing and matting, the weather on the day of the auction, the number of people attending the auction, whether or not telephone bids were accepted, the amount of effective advertising that went into the marketing of the items at the auction, and the obvious fact that private sales of an artist’s work is not available to the appraiser, as well as the fact that galleries often times inflate the amount actually received for an artist’s work, etc.

Markets can be extremely small. Although not usual, but under special conditions a market may be as small as three individuals, i.e., the seller, the buyer, and another potential buyer.

There can be no question that the appraising of art is an “art form” in and of itself, and is in fact not a scientific endeavor. Appraisers, especially the Appraiser offering this appraisal, only offer their opinion about a particular piece of art’s value, which is based upon the appraiser’s experience, education, and knowledge, and in no way tries to objectify a specific piece of art’s value, but recognizes that an appraiser’s opinion as to the value of a specific piece of art is entirely subjective and subject to disagreement.

Learn more about art appraisals.