Appraisal Literacy: Top Ten Tips
Erica Claus – August 17, 2017
Published in MUSE 2017
Watch what happens when you gain a better appreciation of the appraisal process, and experience how it can make curatorial work, cultivation of donors, collecting and institutional management and governance more transparent by gaining the know-how to reduce costs and mitigate risks for individual donors and collecting institutions. Top Ten Tips emerged from discussions with museum professionals, donors, appraisers and students in Canada and the US and are intended to demystify the appraisal process. The Top Ten Tips explain the ethical and moral factors inherent in arriving at fair market values, and the rigorous methodology that underpins a well-reasoned and justified fair market value appraisal.
1 – Understand fundamental appraising ethics.
The fee charged for an appraisal must never be a percentage of the appraised value; the appraisal must be researched and prepared at arm’s length from the donor and the institution; the appraiser must not have a present interest in the property being appraised and should declare any past interest; and any information discovered in the appraisal research and data collection is confidential.2 – Be clear on what it’s worth.
“The highest price, expressed in terms of money, that a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other” (fair market value definition endorsed by the Canadian Cultural Property Export Review Board and the Canada Revenue Agency). Determining this worth involves research on auction and gallery sales records, artist’s studio records, exhibition history and the quality of provenance. The “highest price” does not mean the highest price ever paid for an item; it means the highest price consistently achieved in the most relevant market; outliers are not acceptable fair market values. Asking prices easily available online are irrelevant to the determination of fair market value because they are “asking” prices (hopeful), not prices “realized” (factual results). Prices realized at a charity auction are not evidence of fair market value because buyers may be motivated to support the charity by bidding well above the actual fair market value. Insurance appraisals are not fair market value because they represent replacement cost which is often higher than fair market value.3 – Appreciate the client – appraiser relationship and ask questions.
The client determines the requirements and objectives of the appraisal project. After discussing the project with you the appraiser should be clear about the kind of appraisal that is in your best interest.
4 – Know what types of appraisals are relevant.
Institutions accepting donations require a fair market value appraisal. This establishes prices paid for similar objects in an open and unrestricted market. Insurance appraisals establish the replacement cost of an object should it be damaged or destroyed and are required for museums insuring collections and undertaking regular appraisal updates. This value can be significantly higher than fair market value. Insurance appraisals are irrelevant for the purposes of donation. This is why a donor’s previous insurance appraisal is not useful in determining what an object can command on the open market.
What is the difference? Fair market value appraisals assess “market value” while insurance appraisals assess “replacement cost”. The first calculates what an item would sell for in an open market. The second calculates what it would cost to replace an item with an identical or similar one. For example, an official portrait’s insurance appraisal might be $30,000.00 (the cost to pay a portrait artist to replicate the item for replacement) while the fair market value could be $3,000.00 (the price one would pay on the open market to purchase an existing portrait).
5 – Help donors understand how a professional appraisal protects them.
High hopes are common, sometimes resulting in a considerable gap between a donor’s expectations of what an object is worth and the reality of the market. Explaining the steps required in a professional appraisal may help a donor accept the process as well as the results. Sometimes showing a donor auction sales results or recently sold similar pieces will help them to better appreciate the reality of the market place.
6 – Know where to find a professional appraiser.
The appraisal profession remains unregulated and it is, therefore, an informed appraisal client who will find the most appropriate appraisal professional. An appraiser who is member of a professional association provides some assurance that a level of rigor and ethical standards is maintained. Members of professional associations have the advantage of an extensive network of colleagues in a wide range of disciplines. If the appraiser doesn’t have the answer, it is likely they will know where to get it effectively and efficiently. The appraisal associations listed below all have rigorous education and experience requirements which sets them apart from organizations that accept members on a subscription basis.
7 – Ten questions to ask an appraiser.
Are you a member of a professional organization that requires regular training and examinations? Which one? Are your credentials current?
Some associations require members to take courses and pass exams before being admitted as members.
What has your training prepared you for?
A qualified appraiser is experienced with the type of object being appraised, trained by professionals in appraisal theory, principals of valuation, ethics and law and should be up to date on the latest appraisal standards.
How many years have you been appraising?
Gives an indication of experience.
What is the largest single dollar value appraisal you have worked on?
Identifies financial scope.
How will you handle items which are outside your area of specialty?
Professional appraisers know their limits and should consult with other experts when needed.
How do you charge for your services?
Ask for a clear breakdown of the fees, whether hourly, flat rate or by project. Appraisers and appraisals vary widely and consequently so do the fees for service. There are no fee schedules. Expect to be charged a fee for a professional service, time spent, related expenses and travel.
Do you provide other services?
Some appraisers also act as brokers, advisors to clients, attorneys or executors regarding disposition, and perform appraisals for estates and equitable distribution.
Does the organization you belong to have a printed code of ethics?
The code of ethics and professional conduct will explain the standards to which the appraiser is committed, including requirements regarding accuracy, objectivity, competence and conflict of interest.
Will you provide a report? What can I expect?
You should receive a formal, typewritten report containing all the information you require to understand how the fair market value was arrived at. Some associations train members in appraisal report writing standards.
What happens if I still have questions after reading the report?
A qualified appraiser should be prepared to answer all your questions and when new information surfaces, should be willing to discuss it with you and to resolve any outstanding matters.
8 – Recognize the varied responsibilities of the appraiser, the institution and the donor.
An appraiser takes direction from a client and helps determine the type of appraisal required. The appraiser is responsible for providing a well-supported and documented appraisal report, with a clearly written rationale of value, which with very few exceptions, includes information detailing sales of comparable objects. The institution is responsible for providing information on authenticity, provenance, condition, itemized descriptions and photographs. For items being appraised for Cultural Property Certification, the institution will provide the statement of Outstanding Significance and National Importance (OSNI) required by the Review Board. For a fee, the appraiser can also assemble this information and conduct research which can include hiring specialists (conservators, authenticators). The donor is responsible for providing archival documentation accompanying the item as well as provenance and clear title. It is inappropriate for the institution or the donor to suggest expected or anticipated fair market value for the object. It is desirable for the institution and donor to provide information to the appraiser before work begins.
9 – Know how to get out of a bind.
Three key facts can be used should one be confronted with pressure to accept objects with anticipated results.
Reinforce the value of professional arms-length appraisals in protecting the donor and the institution from questions or scrutiny later on.
Share the institution’s and/or the appraisal association’s codes of ethics and professional conduct.
Provide examples of recent sales of similar items to demonstrate realistic market results.
10 – Know what to avoid.
With the knowledge gained by becoming appraisal literate you might reduce high costs and mitigate risks that can be generated by:
Incomplete information
Unverified data
Unsubstantiated comparisons
Interpersonal conflicts
Unrealistic expectations
Legal disputes
Tax questions
The courts
Resources
International Society of Appraisers (ISA) https://www.isa-appraisers.org
Canadian Chapter of ISA https://www.isa-appraisers.ca
Appraisers Association of America (AAA) http://www.appraisersassociation.org
American Society of Appraisers (ASA) http://www.appraisers.org