Ask an Appraiser: Fair Market Value vs Replacement Value
Ask an Appraiser: Answers to the Questions We Hear Most
At Art Partners Advisory, our Paris-based practice works with collectors, estates and institutions around the world. We are often asked the same handful of questions by clients navigating an appraisal for the first time and below we address the questions that come up most often.
What is the difference between fair market value and replacement value?
These are the two most common types of appraisal, and confusing them is one of the more costly mistakes we see.
Fair market value reflects what a willing buyer would pay a willing seller in the current market. This is the standard used for estate tax, charitable donation and equitable distribution purposes.
Replacement value reflects what it would cost to replace the work with a comparable piece at retail. This is the standard used for insurance coverage.
These two figures can differ significantly for the same piece of art. A third figure, marketable cash value, is sometimes used for collateral lending, and reflects what a work would fetch after accounting for the costs of selling it, such as commissions and fees. None of these values follow a fixed formula or convert neatly into one another, which is why an appraisal prepared for the wrong purpose can delay a filing, undervalue a claim or create complications with the IRS, an insurer or a lender.
What documentation should we gather before contacting an appraiser?
Whatever documentation you have is a good starting point, though nothing is required to begin the process. Useful items include provenance records such as bills of sale, gallery invoices or prior appraisals, exhibition history or catalogue references, condition reports if any exist, and photographs, ideally including any signatures, labels or inscriptions.
If none of this is available, that is entirely normal. Part of the appraisal process is establishing what can be documented and what will require further research.
How do we know an appraiser's credentials meet IRS and insurance requirements?
For charitable donations in the United States valued above five thousand dollars, the IRS requires a qualified appraisal prepared by a qualified appraiser, meaning one credentialed through a recognized professional organization such as the Appraisers Association of America and compliant with USPAP, the Uniform Standards of Professional Appraisal Practice. Estate and gift tax appraisals are governed by somewhat different, less prescriptive regulations, though USPAP compliance is widely regarded as best practice there as well, and is generally what insurance companies look for too. It is worth asking directly whether an appraiser's reports meet USPAP before engaging them, particularly for estate, donation or tax related work. You can read more about our USPAP-compliant appraisal services here.
How often should a collection be reappraised?
The art market rarely moves in one direction at once. Estate driven sales of major works can produce headline prices at the very top of the market, while other segments, including some contemporary and post war artists, have cooled noticeably in recent years. Emerging artists in particular have seen sharp swings, with works that commanded strong prices a few years ago sometimes reselling for a fraction of that value today. A single record result does not mean the whole market is rising, just as a correction in one area does not mean values are falling everywhere.
This is why a periodic reappraisal matters, and not only when values might have increased. Collectors are sometimes underinsured on works that have become scarce and now command far more in the secondary market than the original purchase price reflected, since a payout based on what was originally paid may not be enough to replace the work today. Just as often, a collection insured at peak, pandemic era prices for emerging artists may now be overinsured relative to current market reality. Reviewing valuations every few years, or after a significant shift in an artist's market, helps ensure coverage and expectations stay aligned with where the market actually stands.
When should we involve an advisor rather than an appraiser alone?
An appraisal answers what a work is worth and why. An advisor helps with the broader picture, including whether to sell, donate, insure or pass a collection down, and how to make that decision well. For estates and larger collections in particular, the two roles often work best together.
A note before you begin
Every appraisal begins with a conversation about purpose, whether that is estate planning, insurance, donation or sale, because that purpose shapes everything that follows. If you are not yet sure which you need, that is a perfectly normal place to start.
If you have a question about your own collection or an upcoming appraisal, we would be glad to hear from you at info@artpartnersadvisory.com. For a closer look at what to prepare before your first appraisal, you may also find our free guide on estate and insurance appraisals useful.