It’s well established that one of the root causes of the recent U.S. banking crisis was over-inflated and poorly researched property and housing appraisals. Poor appraisals that resulted in a financial crisis are not new: faulty appraisals were also at the root of the Savings and Loan failures of the 1980s and 1990s. In both crises, loans were made on the basis of appraised value. When a property’s appraised value was overstated and the loan went bad, there was not enough actual value in the property to collateralize the loan.
Poorly executed personal property appraisals can result in negative fallout as well. Estate executors who rely on appraisals to settle an estate can be sued by heirs; property owners can suffer loss from either over-payment of insurance premiums or under-insurance based on an appraisal; and taxpayers who use an appraisal to justify a tax deduction may face stiff fines if the appraisal is overstated or rejected outright. Anyone who offers appraisal services – including antique dealers – must be able to defend the appraisals that they give.
Antique dealers perform appraisals on a regular basis in their shops, at appraisal fairs, and at promotional events. How much liability and exposure does a dealer have for the appraisals that they perform? What must a dealer do to defend himself against potential lawsuits regarding his written appraisals?
Dealers have exposure from two sources: attorneys and the IRS.
The US has 70% of the world’s lawyers; roughly one lawyer for every 200 people. None of them get paid unless they successfully sue someone. We are a litigious society.
It’s unlikely that a dealer will be sued over an appraisal unless the amount involved is substantial; there has to be enough money involved to pay a lawyer and have something left over. Risk for a dealer is directly proportional to the value of the item.
A more serious concern for dealers is the IRS. A dealer-appraiser who prepares an incorrect appraisal can be subject to a penalty under Section 6662 of the tax code if:
• The appraisal results in either the 20% or 40% overstatement penalty to the taxpayer.
When performing a tax appraisal, the risk to a dealer lies in providing a value that is more than 20 percent too high.
An offending appraiser can be fined up to $1,000 and may be permanently barred from submitting tax appraisals to the IRS. In addition, the appraiser may be subject to civil penalties.
The "Ten Commandments" of a Dealer Appraisal
When asked to give an appraisal, a dealer must first ask himself if he knows enough about a particular item to qualify as an expert. It’s not enough to know what sort of price tag he might put on an item in his shop; he must actually have reached a level of connoisseurship for the item. Don’t attempt to give a valuation where no connoisseurship exists.
The public generally accepts that value can be established through the informed opinion of an expert. Smart consumers know that opinions vary, so they may ask two or three "experts" to value their item before arriving at a value conclusion. Consumers often assume that the opinion offered by an antique dealer constitutes a valid appraisal. Nothing could be further from the truth, and therein lays the problem for dealers: an appraisal that will stand up in tax and civil courts must meet the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP). Few antique dealers are trained in USPAP.
Dealers can easily avoid disappointing their customers and stay out of trouble with tax and court authorities by following some simple guidelines when they write an appraisal. The guidelines are:
1. If you are charging for the appraisal, write everything down. Otherwise, you may find yourself in a ìhe said, she saidî argument in the future. If you’re not charging, don’t give them anything at all in writing.
2. Don’t call your valuation an appraisal; doing so opens the door for trouble. In real estate, mortgage companies pursuing a home foreclosure rely on the value opinion of real estate brokers rather than a costly appraisal. The value so presented is called a Broker’s Price Opinion (BPO); the name clearly says ìthis is not an appraisal it’s a broker’s opinion of valueî. Find a word that suits you other than ìappraisalî and use that instead.
6. Identify the type of value; i.e., market value, auction value, retail value, replacement value. Value is circumstantial, and the value of items may change. On Antiques Roadshow, the appraisers are generally careful to define the value they place on objects. You will hear "I believe this item would bring $X at auction," or "In my shop I would put a retail price of $X on this item."
7. Identify your market area. An item may be worth more in New York City than in Harlan, Kentucky.
8. Write a good description of the item: brand, serial number, markings, material, and anything else that helps you arrive at a value.
9. Take good photographs.
10. Add a short paragraph that tells who you are and why you are qualified to make the valuation.
These ten items can easily be presented fill-in-the-blank style on a single page.
USPAP-compliant appraisals have strict requirements that are much more detailed than the above suggestions. Dealers can avoid the complications resulting from a "too casual" approach to appraisals if they will clearly identify the item and state that they are providing their opinion of an item’s value to a certain individual for a particular purpose on a stated date and for a stated place (market).
MORE RESOURCES FOR ANTIQUE COLLECTORS and DEALERS