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Art Valuation

The estimation of the fair market value of works of art

What is Art Valuation?

Art valuation is a part of financial valuation that deals with the estimation of the fair market value of works of art. The practice of art valuation combines the techniques of financial valuation with subjective views on the cultural value and significance of a particular artwork.

Art valuation is a sophisticated branch of financial valuation since it requires a high level of expertise in valuation methods, as well as deep knowledge of the art world. It can be used for different purposes, including investments in works of art, tax planning, and insurance. Valuation of artwork is a perfect example of why financial valuation is both an art and a science.

 

Art Valuation

 

Nowadays, the industry of art valuation is booming. A growing number of investors is turning to artworks as an investment option. Works of art provide investors with lucrative returns because art pieces can significantly appreciate over time. However, investing in artworks is remarkably risky because the chances of profitability are relatively small but the probability of losing money is high.

The valuation of artworks is primarily performed by art appraisal companies. In addition, art dealer companies like Sotheby’s and Christie’s provide art valuation services.

Valuation Courses

The Corporate Finance Institute has a few courses on financial modeling and valuation that are part of the FMVA Program. Here is a list of the top valuation that CFI currently offers:

Key Factors in Art Valuation

Similar to traditional assets, the valuation of works of art may be driven by numerous factors. The art valuator should carefully assess all catalysts that can drive up the fair value of an art asset. The following variables are the primary factors influencing the valuation of artworks:

 

#1. Demand

The current demand in the market is a key driver of an artwork’s value. The demand is usually derived based on the demand for similar artworks. However, the identification of comparables can be problematic due to the unique nature of the artworks.

 

#2. Liquidity

Artworks are highly illiquid assets. An artwork can become liquid only if there is a high demand for it in the market. Therefore, an art evaluator must always consider the liquidity risk associated with art investments.

 

#3. Activity of the art dealers

The price of artworks may change due to the activities of art dealers. The dealers often enter into contracts with artists. It is common that art dealers may decide to acquire the works of artists at an auction, which subsequently affects the price of the artwork.

 

#4. Market data

An art evaluator can use market research data provided by various companies to integrate the information into the valuation analysis. The research data reveals the sales volumes of auctions and relevant price levels. The market data is provided by auction houses and companies specializing in market research.

 

Additional Resources

Here are some additional resources that we think you might find interesting:

Valuation Techniques

Learn the most important valuation techniques in CFI's Business Valuation course! Step by step instruction on how the professionals on Wall Street value a company.  

Learn valuation the easy way with templates and step by step instruction!