Value of art is in the eye of the appraiser, judge and insurance company
Working at large banks, auction houses and small firms, appraisers exert influence in every corner of art finance. In a secretive market where accurate information is scarce, these experts guide high-end collectors in setting sale prices, making tax deductions, buying insurance and establishing collateral for loans.
As the fine-art market rebounds from a two-year slump, investors should consider what happened when two established appraisers were called upon to place a value on Hole and Vessel II, an abstract sculpture by Anish Kapoor.
The artwork, made of polystyrene, cement and earth and standing about 3 feet tall, resembled a giant, red pine cone — or a sea anemone — with a hole at one end. After it was accidentally discarded by a warehouse employee in London and presumably destroyed, the two appraisers provided a judge with wildly different valuations in 2007.
Ben Brown, a London gallery owner who had sold some of Kapoor's pieces, rhapsodized over the sculpture's elegance and curves, what he called its sensuous suggestion of a female body. He pegged its value at 580,000 pounds ($904,000).
Michael Thomson-Glover, co-owner of appraisal firm Stancliffe & Glover in London, found the bumpy sculpture to be clumsy and somewhat absurd. "I said it looked like a lactating raspberry," Thomson-Glover says. He put its worth at only 250,000 pounds ($397,000)
High Court Justice Nigel Teare's verdict: You're both wrong. He called into question the appraisers' expertise and objectivity.
"I have had the benefit (and enjoyment) of expert evidence," he wrote in his 2007 ruling. "Mr. Brown's views were colored by his personal likes and dislikes. Mr. Thomson-Glover, on the other hand, had no knowledge of the market for Kapoor's works."
The justice set the value at 371,250 pounds ($590,000), based on the price of another Kapoor, Mother as a Ship, that sold in 2004.
Despite such judgments, art buyers find themselves beholden to the opinions of a small coterie of appraisers. Their valuations are helping to drive the market as it rises, with Pablo Picasso's Nude, Green Leaves and Bust — a curvy-lined painting of his mistress Marie-Thérèse Walter — selling for a record $106.5 million in May.
Working at large banks, auction houses and small firms, appraisers exert influence in every corner of art finance.
In a secretive market where accurate information is scarce, these experts guide high-end collectors in setting sale prices, making tax deductions, buying insurance and establishing collateral for loans.
While the appraisers' reach is broad, their valuations are influenced by everything from their personal tastes to the desire for higher commissions, says Philip Hoffman, chief executive of the $100 million Fine Art Fund Group in London.
"Appraisers give a lot of meaningless valuations," says Hoffman, who relies on the ones he trusts to value his funds' holdings. "Their work can be based on fashion and connoisseurship. The art world is complicated, and valuation is a part of that."
Appraisers who negotiate the sale of artwork sometimes jack up valuations to boost commissions, says Lewis Baer, owner of decorative-arts gallery Newel in New York. Auction-house experts play a different pricing game, regularly giving lowball values in catalogs with the hope of creating bidding wars.
Adding to the variation in pricing, appraisers fudge valuations submitted to the Internal Revenue Service so that clients pay less tax on inherited art and get bigger deductions on donated works.
The IRS says that from 2006 through 2008, a majority of audited estate- and gift-tax appraisals understated the worth of the art by an average 44 percent.
Thomson-Glover, who worked for 27 years selling and valuing art at Sotheby's in England and Italy, says appraisers have leeway in setting prices higher or lower without violating laws or professional ethics.
"When there's a range of values, it's perfectly reasonable to be conservative," Thomson-Glover says. "We do a valuation for tax purposes, which is as low as the market will allow. Then, if we're trying to sell it, we want to achieve a maximum value because we're working on a percentage."
Art buyers should know the motives of appraisers to avoid getting played, says Howard Rachofsky, a former partner at hedge fund Regal Asset Management.
A major Dallas-based collector, Rachofsky owns about 600 post-World War II works by artists such as American painter and photographer Richard Prince and Italian Alighiero Boetti, maker of embroidered maps of the world.
Rachofsky exhibits them in a house that architect Richard Meier designed with towering windows to illuminate the collection.
When buying art, Rachofsky hires his own appraisers and pays them a set fee to provide a reality check on valuations from dealers, which can be as much as 30 percent higher.
"Dealers, if they have an artist they want to promote, they will give valuations that are higher than they should be," he says. "That's when you want to get an independent appraiser to say: 'The dealer is telling me this. Where's the market?' "
While artists are hitting records this year, such as the $44.9 million for J.M.W. Turner's Modern Rome — Campo Vaccino, the market hasn't regained all the ground lost since the global credit crackup.
Prices for the most expensive artworks gained 17 percent from January through July, yet are still a third lower than their October 2008 peak, according to an index by London-based Art Market Research.
The U.S. government has begun to crack down on appraisers who play too loose with the numbers. Three times a year, the IRS uses a panel of appraisers from galleries and museums to review art valuations worth hundreds of millions of dollars that taxpayers submit with their returns.
In 2006, the panel found that 78 percent of valuations submitted by collectors for work donated to charity overvalued the works.
That year, Congress stiffened penalties for appraisers who produce bogus valuations for the IRS. New federal rules, expected by next year, say taxpayers who submit valuations after donating art must use an appraiser certified by a trade group or has college-level training.
The restrictions don't cover valuations for estate taxes or for buying and selling art, leaving room for shenanigans to thrive, Newel's Baer says. As appraisers massage the numbers, investors would do well to follow Rachofsky's advice and get a second opinion before buying or selling a work.
However, in the newly frenetic global market, judging the value of an appraisal — and the person who made it — may be as hard as divining the worth of the art itself.