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How Accurate are Appraisals?

How Accurate are Appraisals? – Business of Doing Business – The Journal of Antiques and Collectibles – December 2004
By Ed Welch
The appraisal process is not well understood by the buyers and sellers of antiques. Generally, when a seller asks for an appraisal, he or she does not really want, and is not willing to pay for an appraisal. The seller simply wants to know the answer to the question: For how much money can I sell this item?
The correct answer is not a simple dollar figure. The correct answer depends on the position that the seller holds in the hierarchy of the antique trade. An expert in a particular antique specialty may be able to sell a certain item for $100. A novice or a homeowner would do well selling the same item for between $40 and $60. An appraiser must understand the “chain of distribution” involved in the selling and reselling of a given item. The appraiser must also know the level of the chain of distribution at which the seller operates.
An appraiser must know the reason the seller is selling and he must also know the reason the buyer is buying. The last sentence suggest that a given item may have more than one value. How can this be so?
I operate an appraisal network on the Internet. More than 20,000 people each month asked me the question, for how much money can I sell this item? Less than a dozen people each year want or need an appraisal based on known facts and actual selling records.
My experience is that 99.9 percent of people who ask the question, for how much money can I sell this item, are not willing to pay anything for this advice. They believe that dealers should provide such advice free. For this reason, most dealers avoid giving advice on selling values.
I recently completed a professional appraisal that took several months and more than 100 hours of work. The collection contained many rare and one-of-a-kind items. I conducted the appraisal for insurance purposes. I made it clear to the collector that it was impossible to replace several of the items in his collection at any price.
Should the owner suffer a complete loss, he might be able to replace most of the collection. Doing so would require much travel to attend auctions throughout the U.S. and Europe. My best guess is that it would take the collector at least three years of hard shopping and cost thousands in travel and auction expenses. This particular collection is not for sale. It will pass to the collector’s children. A full value appraisal is the correct type of appraisal for this person.
Let’s look at collections that are for sale and the type of appraisals the sellers of such collections should request.
Suppose a collector decided to sell an entire collection. How much should the collector ask? How much money would you as a dealer pay? Usually, collections are sold under one of the following three conditions; a controlled sale, a liquidation sale, or a panic sale. How accurate is a full value insurance appraisal when that appraisal is used to set resale value?
To answer this question, let us look at a hypothetical collection valued at $10,000 for insurance purposes. A full value appraisal is the easiest of all appraisals to do. I called these appraisals “feel good appraisals.” The collector feels good about the high value. The insurance company feels good because the premium will be high. The appraiser feels good because everyone involved in the appraisal is happy. All the above assumes that appraisal values are accurate and supported by actual sales and auction records.
Let us suppose that the worst thing happens and the entire collection is lost in a fire. The collector, with $10,000 in his pocket, sets out to replace his collection. Replacement time of one to two years is reasonable. The cost to the collector would include travel expenses, antique show fees, and auction buyer’s premiums. Buying expenses tend to be around 10 percent in the antique trade (buying expenses at auctions can be as high as 17 percent). When the collector runs out of money, he or she will have been able to replace about 90 percent of the collection. The original $10,000 collection will be replaced by a collection valued at less than $9,000. In the above example the full value appraisal is off by more than 10 percent.
Let us suppose that the collector decides to sell the $10,000 collection. He or she will have three options; slow controlled sale, liquidation sale, or a panic sale. Lets look at each method of selling to determine how much of the $10,000 value ends up in the collector’s pocket.
A controlled sale will produce the most income. In order to receive the highest value, the collector must take charge of the selling. Sales can be made from group shops, antique shows, and some items can be placed in auctions. The complete liquidation will take a year or two. Generally, selling expenses in the antiques trade average 21 percent. The collector must also be willing to discount each item 10 percent. A $10,000 collection after selling expenses and discounts is likely to put between $6,000 and $7,000 in the collector’s pocket. In this example, a full value appraisal is off between 30 and 40 percent.
A liquidation sale is generally the sale of the entire collection to one dealer or the sale of the entire collection at one auction. Selling expenses by auction is generally 20 percent. This reduces the value of the collection to $8,000. The actual dollar amount that the collection will bring is unknown. If all buyers at a given auction are dealers, the sale figure will be between $5,000 and $6,000. A few pieces will sell for much more than they are worth, most items will sell for less than 50 percent of what they are worth. In this example, the full value appraisal is off between 40 and 50 percent.
Should the collector decide to sell the entire collection to a dealer, the collector will have more control over the selling process and the selling price. How much would you pay for a $10,000 collection? Keep in mind that your selling expenses will be around 20 percent. I cannot answer the above question for other dealers. However, I have bought many such collections. If I could resell the entire collection in 30 days, I would pay $7,000. If resale time is one year, I would pay $5,000. If resale time is more than one year, I would not buy the collection. In this example, the full value appraisal is off between 30 and 50 percent.
The panic sale has many collectors sell when a family emergency or some other reason produces a need for ready cash. The seller is unwilling to wait 90 to 120 days for payment from a major auction service. The collection is usually placed in a small local auction. The in-the-pocket money from such a sale is usually less than 50 percent of value. This is true because most of the buyers at such auctions are dealers. In this example, the full value appraisal is off 50 percent.
When a collector selling under panic conditions contacts a dealer, the dealer can easily pay more than most small auction houses. Moreover, the dealer has the advantage of offering cash on the spot.
Three years ago, a collector with a medium-size collection of medical antiques contacted me. I offered the collector $15,000 for the lot. Although my offer was higher then offers from other dealers, it was less than the amount quoted by a local auctioneer. The entire collection was placed at auction. I attended the auction and spent $5,800. I did not purchase three major pieces that sold for a total of $5,400. The three items are hard to resell. As part of a lot, I was willing to handle these items. However, when able to pick and choose, I avoid hard to sell items. In addition, I did not purchase items of low value that sold for a few hundred dollars. The auction generated nearly $14,000 in sales. After auction commissions, the collector received less than $12,000.
I have spoken with the collector several times about this sale. He is not upset that he received $3,000 less than the price I offered. His reasoning is that he could have received much more money had more buyers of medical antiques been at the auction. His attitude raises an interesting question. What part, if any, does risk-taking and gambling play in the decision to sell at auction?
Appraisals are accurate only when the appraiser is told the true reason for the appraisal. Many collectors want a “feel good” full value appraisal even when their intention is to sell the collection. Such an appraisal is not a useful foundation upon which to base a sound selling decision.

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