In 1972, Stephen Weil wrote the Art in America article “Prices-Right On!” in which he commented on the performance of a Parke-Bernet sale relative to pre-sale estimates: “In theory, at least, the top [high] estimate should be somewhat less, perhaps 10 to 20 percent, than the price a gallery would ask for a similar painting or sculpture. (For its higher price, the gallery may provide a range of works from which to choose, a chance to try works at home on approval, guarantees of authenticity, and condition, and even extended payment terms and the right to make a later exchange).”
In many (if not most) market sectors, it is still expected that dealers will command a premium relative to the auction market for similar property, for reasons such as those noted by Weil. The precise ratio, however, which is far from standard, is a constant source of challenge and inquiry for appraisers. The compexity can be highlighted, for example, when an appraiser is assigned to assess both the Retail Replacement Value and the Fair Market Value of works of art.
RRV, as defined by the Appraisers Association of America, is the “highest amount … that would be required to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market.”
FMV, by contrast, is “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” (See: IRS Publication 561). [NB: Notwithstanding its source, FMV and this definition of it are commonly used in a variety of non-IRS applications.]
Sometimes the appraiser, when assessing RRV in a market with few or no available relevant comparable retail sales or offerings, must look to the auction market and extrapolate upwards, but the ratio is not necessarily a summary 10-20%, nor is it 30-40% or some other fixed range that can be applied to any property, but rather it is a ratio that is specific to each market.
Speaking broadly, the delta between FMV and RRV for the same object tends to be much smaller at the high end of the value spectrum. For example, a Rothko that sells for $50 million at Sotheby’s might only be privately marketable for slightly more than such a realized auction price. It may well be that a dealer could only reasonably offer that same painting for $55 million, and therefore, in that stratospheric market, RRV may potentially be no more than 10% higher than FMV.
Consider, then, an emerging artist whose works are offered for $20,000 in the primary market. There is ample supply, no secondary retail market, and works that are occasionally offered at auction fetch only $5,000. In such a case such as this, RRV may well be quadruple FMV.
There are innumerable examples, principally at the low end of the market, in which a secondary market price on LiveAuctioneers will only be a small fraction of the original retail price. There are many works with no secondary market history and no ostensible attainable secondary market at all. In all such cases, the difference between RRV and FMV would follow from these variances.
There are also cases in which an appraiser must assess FMV for an artist whose works have never traded in any secondary market but show promise to attain strong prices if they were to be offered. Demand as well as supply in the primary market would be likely to offer insight as to what a secondary market may hold for the artist.