New Article - What is "Fair Market Value?"

Hi Neil,
Well this will keep me awake tonight in more ways than one.
So, my first question is, lets see, what are you hiring me exactly to do?

We had a gold buying story on TV - an after the news program A Currnt Affair on last night in
Oz.
Kiosks paid about 20% of the value of jewellery bought a few hours before. Some upstairs dealers paid nearly half the retail price.
Of course the sensationalist journo's thought even that was a rip off - no matter all the jewelry was hollow complex construction, included 10% GST, and a manufacturers, wholesalers and retailers margin.

Every one can spin any value they want.

Thanks Neil.

I do wonder, though, when I might be concerned specifically about "fair market value," and this prompted me to put it into google, adding the terms: "diamond" and "insurance." Not surprisingly, it brought be back to Pricescope...and another article attributed to Dave and you! Here: http://www.pricescope.com/wiki/diamond_appraisers_why_you_need_one_and_what_expect

Reviewing your other article, it seems like fair market value (fmv) is just a "paper tiger" stand in for anyone appreciating that the notion of value is like mercury, hard to pin down.

More controversial, though, and what you also discuss in that other article, is the meaning of "retail value." For that one, substantive controversy would have teeth, and it's where an appraiser is actually called upon to assign value. The basis for defining "retail value," a topic that has variously been discussed before, but...to my mind...could use clarifying attention, would make for reading, where the reader will be able to bring application to the interpretation given.

Otherwise, FMV, and the value one gives to it, could make for interesting reading, I suppose. But, deciding what you want your appraiser to do for you when they set valuation...that's another topic yet again. And...the tried and true suggestion to specify "your market" may be descriptively accurate, but substantively without useful application. But...I digress...since it is not THIS topic.

Ira Z.

Written by Garry:We had a gold buying story on TV - an after the news program A Currnt Affair on last night in
Oz.
Kiosks paid about 20% of the value of jewellery bought a few hours before. Some upstairs dealers paid nearly half the retail price.
Of course the sensationalist journo's thought even that was a rip off - no matter all the jewelry was hollow complex construction, included 10% GST, and a manufacturers, wholesalers and retailers margin.

Every one can spin any value they want.

With ANY appraisal, FMV or not, the first step should be an interview with the client that spells out the purpose of the appraisal and clearly lays out the definition of value to be used for that particular assignment (among other things). News people routinely misunderstand this, possibly deliberately, because it makes for a more sensational story. Consumers routinely misunderstand this. Dealers routinely misunderstand this and routinely want to see to it that others misunderstand as well. Even appraisers routinely don’t get it. It’s a fundamental concept of value and of appraising.

Written by Regular:Thanks Neil.

I do wonder, though, when I might be concerned specifically about "fair market value," and this prompted me to put it into google, adding the terms: "diamond" and "insurance." Not surprisingly, it brought be back to Pricescope...and another article attributed to Dave and you! Here: http://www.pricescope.com/wiki/diamond_appraisers_why_you_need_one_and_what_expect

Reviewing your other article, it seems like fair market value (fmv) is just a "paper tiger" stand in for anyone appreciating that the notion of value is like mercury, hard to pin down.

More controversial, though, and what you also discuss in that other article, is the meaning of "retail value." For that one, substantive controversy would have teeth, and it's where an appraiser is actually called upon to assign value. The basis for defining "retail value," a topic that has variously been discussed before, but...to my mind...could use clarifying attention, would make for reading, where the reader will be able to bring application to the interpretation given.

Otherwise, FMV, and the value one gives to it, could make for interesting reading, I suppose. But, deciding what you want your appraiser to do for you when they set valuation...that's another topic yet again. And...the tried and true suggestion to specify "your market" may be descriptively accurate, but substantively without useful application. But...I digress...since it is not THIS topic.

Ira Z.

Ira,

FMV is, in most cases, used as a legal term and it applies to things like charitable contributions, bankruptcy, divorce, etc. Unfortunately, people tend to like the word ‘fair’ in the title and they like the sound of legal terms. A significant number of people use it to mean ‘reasonable price to pay’, ‘appropriate price to expect on resale’ or similar uses. At best it’s of limited value for this and at worse it can be terribly misleading. Call it a paper tiger if you wish but it usually simply doesn’t apply. That’s true of any definition. ‘Retail value’ is a term I rarely use because it causes so much confusion. Usually it means something akin to “manufacturer’s suggested retail price” as it applies to other products. A manufacturer can suggest whatever they like but it’s not at all unusual to find that the participants in the marketplace, meaning buyers and sellers, ignore that suggestion.

My way of handling the use of "Fair Market Value" is to never use the term unless an appraisal is required for IRS purposes. I would never use this terminology for any other reason because its use has been so thoroughly confused and differently defined in so many venues. I would never agree to use this term as a level of the market for a divorce. That arena generally has contentious parties and letting them argue over the value level of the merchandise will be of little benefit to anyone except the lawyers.

The way I teach FMV is to tell appraisers that the amount is your carefully researched value conclusion, always based on comparables found in the markets, and properly detailed in your report. The amount should be what you estimate the party needing the appraisal could realize in an arm's length transaction, all parties with equal knowledge of the item for sale, at the maximum, full amount you would forecast they would obtain (at retail, in other words) that your research would bear out by virtue of other similar found transactions in any markets open to the seller. Such a sale would normally be to an end-user, a consumer, and therefore, by definition, a retail sale. However, the amount may be far lower, or occasionaly higher than what a new item might retail for in a retail store. Remember, FMV pertains, nearly always, to second hand items even if they seem like brand new. Sometimes an old item is worth more than a new one, but not usually. Like most things with appraisals, "It all depends."

And, yes, there are always exceptions. Nothing is ironclad when it comes to IRS issues.

I agree with Neil's summary.

One of the problems with FMV and understanding FMV is that very few people that request FMV appraisals rarely understand WHY they need it.

I often encounter attorneys, state and federal agents, etc who do not have a handle on FMV definitions.
The confusion exists at all levels.

Everyone has a different interpretation of FMV and that's what makes it so difficult to comprehend.

It's a problem not just in the jewelry trade but also for appraisers determining the FMV of antiques, oriental rugs, etc.

Neil...you have at least got the ball rolling...thanks..good article.

If I were dealing with the IRS on this it would be my first assignment with them.
I do recall as a student at GIA in 1980 the talk in the cafeteria was about selling big "one of a kind" crystals to people for tax writeoffs.
Now from what I have learned the IRS would not allow this because these crystals were most often sold in the 'Cutter's Market", not the "Collector's Market" so taking a loss on these type of investments was not allowed.
For 2 days I have be working on all the angles of what this item is....outrageous may be the best spin I can put on it and items like this do get a lot of attention.
So, I am thinking if this was up to me I would start talking to personal property appraisers that could help me with outrageous items in the "Art Gallery" market ?

Written by Jim:If I were dealing with the IRS on this it would be my first assignment with them.
I do recall as a student at GIA in 1980 the talk in the cafeteria was about selling big "one of a kind" crystals to people for tax writeoffs.
Now from what I have learned the IRS would not allow this because these crystals were most often sold in the 'Cutter's Market", not the "Collector's Market" so taking a loss on these type of investments was not allowed.
For 2 days I have be working on all the angles of what this item is....outrageous may be the best spin I can put on it and items like this do get a lot of attention.
So, I am thinking if this was up to me I would start talking to personal property appraisers that could help me with outrageous items in the "Art Gallery" market ?

Hi Jim,
Since rough has more than doubled in price in a year, and polished has only made small creeping movements, there is now a need for a polishing machine to turn polished back into rough.

Well....as a diamond setter for a few years now turning polished into rough may be easier than you think.