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According to Webster’s College Dictionary, an Appraisal is “(a) The act of estimating or judging the nature or value of something or someone, (b) a valuation, as for sale or taxation, (c) an estimate or considered opinion.”
If you are into Antiques & Collectibles, it is easy to see why this definition is simplistic and definitely very broad. What about terms like “Fair Market Value”, “Replacement Cost”, “Insurance Value” and so on? Questions soon arise, for example is a price for an item bought on eBay the same as an Appraisal? Can I insure a Collectible I keep at home for the price I paid for it to the Dealer? What if this item was purchased by my grandmother 60 years ago, what value should I use?” So, if you think that you know what an appraisal is, please hold on to your seat, we are about to embark on a head-spinning short course on what the IRS thinks it is, what your Divorce Lawyer may have in mind, and what you as a Dealer on eBay or other online venue may be prepared to sell at.
The International Society of Appraisers (ISA), teaches us that an Appraisal “is the act or process of developing an opinion of value, cost, or present worth of forecasted earnings; a written report documenting the same; of or pertaining to appraising and related functions”. Well, that’s much better, at least we have an expanded definition that refers to actual values AND costs AND future income potential. However, for most antiques & collectibles dealers, what seems to be the key term here is the word “value”, not only in as much as to how it is obtained (the process of Appraisal), but also for what purpose.
Let’s start with some definitions of “Value”:
Market Value: Refers to the most likely price that a Buyer will pay a Seller for a particular item within a specific market environment and at a specific point of time. This is the most common usage of this term as used for the value of an Antique or Collectible and strictly depends on the sales venue and time of the sale. In other words, it is the price that an item fetches when sold, say at a Flea Market or on Rubylane on such and such a date – period! An experienced Antiques Dealer immediately knows that this Market Value also depends on the knowledge of the Buyer, or the Seller for that matter. In other words, if the Seller does not know that a particular Royal Worcester Figurine is very rare, s/he could sell it at a very low price, but this is still the “Market Value”. This is NOT an official Appraisal Value and has little legal weight. However, this is the value that is used as guidance for most dealers when pricing their items for sale.
Fair Market Value: This is similar to “Market Value” as defined above, BUT with the understanding that the item is sold “in fairness”. In other words, in this situation, both the Seller and the Buyer “know” what the item is (maker, age, condition, provenance etc) and what it is most probably worth at a given period of time regardless of whether a sale happens or not. In such cases, neither the Seller nor the Buyer have any advantage, for example knowledge of any damage that has not been communicated to the other or some special conditions that may affect its price: all information is openly shared and a potential transaction would take place in full honesty. This is the type of Appraisal Values sought in Real Estate Appraisals, such as for a home. IRS also seems to go by this definition, although there are numerous other conditions and “small print” loopholes that may affect the Taxed or Deductible value depending on whether it is for Estate Tax or Donation or Gift etc. But, most importantly and for our purposes, this is the most common type of Value used in formal Appraisals of Antiques & Collectibles.
Other terms include:
Actual Cash Value: [aka “actual value” or “cash value”] Used mostly by Insurance companies and refers to the money or settlement paid to a Claimant in case of loss. This can vary depending on whether an item can be replaced by purchasing an identical item available in the market or it is unique, such as a very old heirloom no longer made or sold, and cannot be readily replaced. The first instance is easy to determine; the latter requires a formal Appraisal. Additionally, in most Insurance cases, there are also other factors to consider, for example Depreciation, Functionality, ability to fully repair and restore the item etc.
Marketable Value: Refers to the net amount after all costs necessary in a sale have been subtracted. Such sales costs may be Sales Commissions, Auction Commissions, Advertising Costs, Appraisal Costs etc.
Net Value: Similar to Marketable Value but less any liens or debts associated with the item or property. This is the value used most often during Divorce Proceedings.
Value in Use or Value in Place: Refers to the amount of money a particular item may contribute to its owner because of its use at a certain place or environment. For example, certain equipment or tools that are essential for the success of a business or one’s profession fall in this category. In a broader sense, this value also covers any sentimental worth attached to the item by the owner, which can be highly subjective, but often plays a huge role when dividing property during a divorce or amongst heirs.
So, how does one go about getting an Appraisal? And when should one seek such advice? On that topic, please see our What is an Appraisal Part II article where we explore several methods that can be cost effective for most antiques dealers and collectors.