Why Pricing Art Is So Difficult

It’s tax time in the US, which means many collectors are trying to determine the value of their donated artwork, because the Internal Revenue Service wants an exact number whenever a taxpayer claims a tax deduction for donated artwork valued at more than $5,000. It defines that number as “a price that can be agreed upon between a willing buyer and a willing seller, without the need for action, and both having reasonable knowledge of the relevant facts”—otherwise known as fair market value.

However, finding that price isn’t always easy. “You’re not always going to find a willing buyer,” Ralph E. Lerner, an attorney and owner of Art World Advisors, told the Observer, adding that he has represented clients challenging appraisals for 30 years. The IRS suggests that tax filers look for “comparable” sales, preferably sales closer to the donation date, but works of art can be very different, and “not all Picassos are the same.”

There seems to be no single way to appreciate something. Indeed, the New York City-based Appraisers Association of America identifies nine ways to determine the value of an item: auction return value, fair market value, forced liquidation value, market value, market value, systematic closing value, sale value, resale value, and salvage value. Beyond that are agreed upon prices (set in the policy by the insurance company and periodically reviewed), damage and loss estimates, auction house estimates and auction sales records, and what sellers say something is worth. In short, the value of any work of art is contingent.

Common Antiques Roadshow Viewers are used to seeing two sets of numbers—the first is the insurance amount, and the other is what the piece might fetch at auction. There is almost always a difference. The cost of insurance is consistently high, usually based on the exchange rate being sold. “You have something that has been damaged, and you want it replaced at the right time,” Deborah Spanierman, an art consultant and analyst in Manhattan, told the Observer. “You can’t wait for good money. There will be no discounts. The painting may need to be framed and shipped to you.” The cost of all those things is part of this type of insurance coverage. Additionally, the sale price is usually more expensive than the fair market value or market value, which is the fair market value minus the cost of buying (auction buyer’s fee) or selling (the seller’s or auctioneer’s commission and other fees).

An auction house’s high and low estimates are, at best, an indication of what might be worth—especially a low estimate, close to the “reserve,” or the lowest undisclosed bid the seller will take—but it’s actually a form of marketing to potential bidders. “Low ratings may encourage more bidding,” art consultant Todd Levin told the Observer. People think, ‘Well, I can get it for less.’” Otherwise, auction rates are consumer sites but may have a strong correlation with the value of an item.

Auction houses get a lot of media attention when works of art sell for millions of dollars, but according to analyst Sandra Tropper, “dealers often charge more for works of art than the auctioneers can get.” They do this because they invest a lot of money in the activities they sell, he noted. “Dealers provide more information about artworks to buyers; they pay for cleaning and rearranging paintings, and they offer more assurance to buyers, promising to return the piece if you’re not happy with it. Auction houses won’t take things back.”

Auction sales records are publicly available and provide hard facts about the prices buyers have paid for works of art, but those prices may not be the norm in the artist market—again, not all Picassos are the same—and many artists do not have auction records. In some cases, primary and secondary market dealers may be the best sources of information on artist prices, although those sales and prices are not made public and are often closely monitored. When gathering information on artist prices, both Tropper and Spanierman ask dealers who represent the artist how their works sell historically and currently. Then they hope they are told the truth.

“This is a relationship business,” Spanierman said, “and I have a good relationship with the vendors. They need to tell me the truth.” When preparing to appraise works of art on a client’s property or a client’s donation to a museum, he expects the dealers to provide appropriate prices and sales information, “because my client may be their client.” Higher rates may result in heirs paying higher estate taxes, while lower rates will reduce the amount the donor can deduct from the tax return.

Fair market value is not a single number but an analysis that considers several factors. Is the piece important to the artist’s work? Is this work from the most sought-after period in the artist’s career? Is the work in good shape, or does it need some level of maintenance? Has there been a public sale of works like this? Has there been much interest in the artist’s work in recent years? Does the owner of the artwork need to sell it now (forced closing price) or do they have time to sell it (structured closing price)? If the work is damaged, is it repairable? If so, what was its fair market value before the damage, and what would it sell for now (damage and loss ratio)? If a work is damaged and declared a total loss by the insurance company but may have some value to the buyer—a damaged Picasso is still a Picasso, after all—what is that value (salvage value)? Is the work used as collateral for the loan, at which point the costs of selling the piece, such as commission, insurance and shipping, are deducted from its selling price?

William Fleischer, president of New York City insurance firm Bernard Fleischer & Sons, told the Observer that “a particular challenge arises when there are no comparable works on the market—something that happens when collectors try to complete a series or replace a rare piece. A seller would agree today.”

It is worth noting that the cost of an appraiser can vary greatly, from $100 to $550 (based on location and experience), while the average for an experienced appraiser can be $300-400 for evaluating individual items or small groups of pieces. Inspection of a large number of items may incur a separate fee, which is negotiated. The two major appraiser organizations—the American Society of Appraisers and the Appraisers Association of America—list in their code of ethics for members that fees are not based on the value of the item appraised, as that could distort the appraiser’s determination of the item’s value. And if the artwork has provenance issues, that may also mean contacting not only the appraiser, but also the attorney who will charge the fees.

It can all “become very confusing,” says Sharon Chrust, an inspector in Brooklyn, New York, “because a lot of people don’t understand why there are these different standards that could exist for the same thing.” He noted the surprise of a recent client who donated art prints by nine different post-war and contemporary artists to his alma mater, Wake Forest University, only to find that the donation was worth less than the insurance coverage for the artworks. “My client thought he could withdraw a lot of money, and he was not happy about that.”

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