In his appraisals, Joshua Baer provides an individual dollar amount for the Fair Market Value and for the Replacement Value of the Navajo blanket being appraised.
According to IRS Section 1.170 and 20.2031 (b), Fair Market Value is: “The price at which the property would change hands between a wiling buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”
In the art market, Fair Market Value is the price a given work of art can be expected to realize either at auction, at an art gallery, or through a private sale within ninety days of being offered for sale. Fair Market Value does not take into account sales commissions which a collector should expect to pay to an art broker, art gallery, or auction company for reselling a consigned work of art. In a private sale, the seller’s commission can range from 10% to 50% of the final sales price of a work of art. Established auction companies typically collect a 10% commission from the seller plus a 25% commission, or “buyer’s premium” from the buyer, plus fees for catalog placement, insurance, and photography. After commissions and fees, the average consignor receives between 60% and 65% of the sold item’s Fair Market Value.
“Replacement Value” refers to the retail price a collector will have to spend in order to replace a damaged, lost, or stolen work of art with a comparable work of art by purchasing that replacement work of art either from an art gallery, auction company, or private collector. In the case of a unique work of art, Replacement Value refers to the retail price a collector will have to replace the damaged, lost, or stolen work of art with a comparably unique work of art. Replacement Value does not include the costs of research, time, or travel associated with finding a venue where the replacement work of art may or may not be available for purchase.
The Internal Revenue Service uses Fair Market Value as the value of a work of art being given by its owner as a charitable donation, provided that the donor has owned the work of art for more than one year. Established insurance carriers (Chubb, Lloyd’s, or Traveler’s, for example) insure works of art in private collections at their Replacement Values. Claims for damaged, lost, or stolen works of art are settled at Replacement Value, minus
Financial institutions and established auction companies will loan money to art collectors against the Fair Market Values of works of art pledged as collateral. However, the amounts of such loans, terms of such loans, and rates of interest charged for such loans depend more on the net worth of the borrower than on the Fair Market Values of the works of art pledged as collateral.
The disparity between the Replacement Values and Fair Market Values of works of antique Native American art expands and contracts according to the strengths and weaknesses of the global economy and the art market. During periods of extended strength in the art market, Fair Market Values can either equal or temporarily exceed Replacement Values. During periods of extended weakness, Fair Market Values can contract to as little as 33% of Replacement Values.
During the last forty years, Fair Market Values either approached or exceeded Replacement Values twice: from November of 1989 through December of 1990, and again
from August of 2000 through December of 2000. During that same forty-year period, Fair Market Values contracted to 50% of Replacement Values during the spring of 1984, during the spring of 1993, and during the spring, summer, and fall of 2001. Fair Market Values for outstanding works of antique Native American art currently stand at between 80% and 90% of Replacement Values.
In most instances, a work of art of extraordinary rarity will support a Replacement Value in excess of its Fair Market Value. However, the Replacement Value of a work of art that is commonly available will be only marginally higher than that work of art’s Fair Market Value.
Collectors of antique Native American art can enhance the values of the works of art in their collections by having those works of art published in books, by having those works of art exhibited in museums, by displaying those works of art to their best advantage in the collectors’ residences, by improving and protecting the condition of those works of art, and by holding those works of art for a period of three to five years. During the last forty years, collectors of antique Native American art who consulted and worked with a knowledgeable art consultant or art dealer saw dramatic appreciation in the Replacement and Fair Market Values of the works of art in their collections.
Collectors of antique Native American art can reduce the values of the works of art in their collections by displaying those works of art improperly, by offering those works of art for sale on a recreational basis, by consigning those works of art to auction at high reserves, by physically damaging those works of art, by improperly restoring those works of art, or by attempting to re-sell those works of art within less than three years of their dates of acquisition. Invariably, the collector who regards his or her collection as inventory will reduce the value of his or her collection, regardless of the quality of the individual works of art in that collection.