In establishing Estate Value and for Inheritance purposes it is essential that owners of valuable and rare objects understand why this difference exists and why it is important.
Fair Market Value
This is an estimate of what your piece will sell for if you offer it for sale on the open market. It may well fetch more at auction if several bidders fight for it. It may also fetch less if interest is minimal or the auction is sparsely attended.
Replacement Value is an estimate of the retail market price. This is what you would have to pay in a Gallery or to a Dealer if you want to replace a piece that has been damaged, destroyed or stolen. Replacement Value is the amount you should insure it for.
There's a difference between Fair Market Value and Replacement Value that often surprises people.
Simply put, the difference represents the Dealer's mark-up.
- Most dealers have large amounts of capital tied up in stock.
- An item may sit in a showroom for months, holding up the cash-flow and filling space that has to be paid for.
- They need to buy low and sell high - it's good business.
- This means that if your insurance company has to replace an art object to replace one that has been stolen or destroyed, they must meet the dealer's price.