While there has been a full legislative-based and regulatory system to monitor appraisers of real estate for a long time, no such animal exists for personal property appraisers.
I guess it just did not seem necessary for Aunt Hilda’s teacups…But what about Uncle Malcom’s Picasso painting?
In 1989, the US Congress passed the Financial Institution Reform and Recovery Act (FIRREA) and set up institutions to establish and enforce standards and qualifications for real property appraisers. These organizations responded to the savings and loan crisis of the day, something some of us are actually old enough to remember…
The legislation was put in place to protect financial institutions and consumers alike from the unscrupulous practitioners. Are appraisers really the unscrupulous? Some were. And while there are other parts of the legislation that handled other aspects of oversight to prevent another such economic meltdown, Title XI of that legislation focused on appraisers.
Who said that building was worth $10 million? The bank trusted whoever prepared the appraisal so much that they gave a loan to the owner using the building as collateral. Who is deciding on the values of the objects on which the loans are based?
So, are we now looking at a similar situation in the Personal Property (PP) realm? People are out there collateralizing their collections of art and other personal property based on appraisals.
Why does this sound so familiar?
It’s not just bankers who are collateralizing loans. But there are private companies doing so as well. “High end pawn shops” promising full confidentiality provide loans to personal property owners. Auction houses provide loans to people who might sell with them in the future. While the banks are regulated, these other lenders and their borrowers operate in “the wild west.” All of these loans depend on the appraisals of the property and the appraisers who prepared them. (Why does this sound uncomfortably familiar?)
And then there are the art and gemstone funds where an investor can buy into these funds based on the value of the property in the fund. Once again, the value is dependent on the appraiser’s valuation. (The SEC has already announced a fraud charge against an investment fund of gems & minerals.[i]) There are groups of people buying shares of individual works through crowdsourcing opportunities advertised on the internet. How does the buyer know what the share is worth? And whether the value of the share of the property corresponds to the item’s appraised value?
Right now, the art market is reflecting a strong economy. Dividends are being paid. Loans (we assume) are being paid in a timely fashion. But what happens when and if the bubble bursts? If past experience is any guide, we could see a snowball effect of defaults, putting the funds, the lenders and the borrowers all in danger. And artwork that is taken over by the unpaid lender faces a liquidation sale at the bottom of the market.
Actually, it is not as bad as it appears. Personal property appraisers are ahead of where our Real Property colleagues were back in the 1980’s. There are already PP appraisers who are accredited by organizations. These are educated and experienced appraisers who are supposed to be following the document put into place by the same organization that set the standards for real estate appraisers: The Appraisal Foundation. And the Appraisal Standards Board, a board within The Foundation, has included personal property standards in their Uniform Standards of Professional Appraisal Practice (USPAP), a set of rules and standards which competent and ethical appraisers follow to value property.
However, the real property appraisers have state boards to which they report and which oversee their activities—keeping them honest. Who does that for personal property? The organizations they belong to and maybe the courts (when a client is unhappy – a costly and often unsatisfactory outcome).
How many personal property appraisers are there? 20,000? No one really knows. Every jewelry store window has a sign saying they do appraisals. Galleries and dealers all do appraisals. Auction houses as well do appraisals. While there are many people in each of the camps who do appraisals, how many actual appraisers are there? I am referring to people that carefully separate the works they appraise from those they sell, buy, or broker – eliminating potential conflicts of interest.
Are the appraisers acting as disinterested parties? Or are they acting in their own best interests making clients with estates happy with low numbers and then selling for much more? Or buying low and then selling high? Or making sure buyers receive appraisals much higher than what was paid to help sell an item or even encourage more buying? The 2017 tax court case of Estate of Kollsman v. Commissioner[ii] provides an example of the Vice President of a prestigious auction establishment trying to make a client happy in two ways – providing a low fair market value for estate taxation and then selling a painting for a high price when it came to property disposition.
The ETHICS RULE in USPAP prohibits activities such as those mentioned above, pointing out the need for appraisers to be independent, impartial and objective and of course honest in their appraisal practices. But who oversees the appraisers to make sure they are following the ethical guidance provided by The Appraisal Foundation? Any oversight? Not if they are not organizationally affiliated or involved in a taxation issue that is looked at by the Internal Revenue Service. As personal property appraisers we may be at the mercy of the Security and Exchange Commission and the IRS, in the not distant future, if we are not careful.
So back to my original question…Who is qualified to appraise what? Who has interests with the properties beyond completing a credible appraisal? Perhaps a listing of appraisers maintained by an organization such as The Appraisal Foundation and not controlled by the Federal Government would be an acceptable way to provide the public with information about who is qualified and who should not prepare an appraisal. (Websites help but those are not monitored either. Marketing firms that construct websites are great at “spin.”)
But such a comprehensive listing could reveal the appraiser’s other activities that might be a potential conflict of interest (if there are any), organizational accreditation or affiliation, what kind of property an appraiser has knowledge of, if they have any education and/or experience with that property…And if they have had any training in the principles of valuation. Right now, the consumer is often at the mercy of whoever they reach first on the telephone to do their appraisal. The investor is at the mercy of the fund manager’s appraiser, the bank is at the mercy of the appraiser who prepared the appraisal for the collector who wants the loan.
Why would competent and above-board appraisers not want such a site that would highlight their expertise and their ethics? I have no answer for this because I see the alternative…here comes the Federal Government. Moving in…one legal case at a time.
[i] Appraiser Registry of State Certified and Licensed Appraisers. See www.asc.gov.
[ii] See SEC Announces Fraud Charges Related to Wisconsin Investment Fund.” Litigation Release 24632, Sept. 30, 2019.
[iii] Estate of Eva Franzen Kollsman, Deceased, Jeffrey Hyland, Executor v. Commissioner of Internal Revenue filed February 22, 2017. Decision upheld by the 9th Circuit U.S. Court of Appeals (case no. 18-70565) on June 21, 2019.