IMAGINE. . . .

. . . . that you are browsing through an art gallery. Your eye glances from one thing to another as you walk slowly around the exhibition space. Suddenly, something attracts your attention, stops you in your tracks.

"Oh-hhhh, I like that," you murmer to your companion.

You move forward, taking a closer look.

"This is really quite beautiful." you say, as you continue to stare at the piece that had caught your eye.

The artwork, like a little puppy in a pet shop window, metaphorically wags its tail, warms your heart, and seems to want to come home with you.

As you stand there enthralled, the initial attraction slowly flickers into a flame of serious interest. A moment later, the interest has become a raging inferno, and you are engulfed in the "desire to acquire". You want to buy!

OK, now what do you do, pull out your credit card and give it to the nearest available salesperson?

Whoa, wait a minute.

How do you know whether the price is fair? Is the artwork actually worth what the price tag says?

Should you maybe haggle a bit over the price? It's not really all that much money, but is it a good investment?

OK, tell the truth now . . . have you ever been in this situation?

Buying art can be great fun and a delightful adventure. It can also be a bit challenging. There is (excuse the pun) an art to buying art. Let's see if we can make the process a little easier for you.

What you are about to read are some very valuable tips about buying art. This is practical stuff that you can use to save money the next time you purchase something from an art gallery.

We are going to give you a peek behind the curtain, take away some of the mystery about how "insiders" buy works of art at the best prices. The secret of success in almost any business is to "buy low, sell high". So we will also show you a wonderfully easy way to dispose of artwork that you've bought, usually at far more than you originally paid for it . . . thanks to a little-known IRS tax loop-hole. There are some exciting "tricks of the trade" to share with you, so let's get going.

Value . . . What It's Worth

What most of us want to know when it comes to buying art is:

  • Are we paying a fair price for the art?
  • How is that price determined?
  • Can we bargain for a better price?
  • Is the art that we are considering going to be a good investment?
  • OK, I'll admit that a couple of these questions are not all that easy to answer. For example; there is no established, agreed-upon price for every painting, print or sculpture. There are no uniform price standards that are accepted by all art dealers and appraisers for ANY work of fine art.

    However, there are ways of determining VALUE ranges, and you can become familiar with what helps to make-up the "fair market value" of almost any work of art.

    Put simply:

    "Price is what you pay, value is what its worth"
    Warren Buffett, Investor

    In other words, "value" also has to do with why something is worth what it's worth in the eyes of the beholder.

    Now, here is something that far too many business enterprises don't understand. The value of an item - in the mind of the buyer - is simply the difference between the anticipated price and the actual price on the tag. When the anticipated price is higher than the price on the tag, it's a "good value". When the anticipated price is lower than the price tag, it's a "bad value". The question, however, is what is that "anticipated" value based upon?

    The value of art is, for the most part, based upon some rather indefinable things, such as; quality, rarity, reputation of the artist, fashion, etc.

    However, before we get into the those value factors let's take a look at how art is priced AFTER a valuation has been established. It might seem backwards, but it will help you to better understand the relationship between value and price.

    Price Markup:

    Basically, there are only two ways in which art is sold in an art gallery:

  • Art purchased by a gallery and then given a retail profit markup, or
  • Art consigned by the artist with the sale price split equitably between gallery and artist as determined by overhead.
  • As a savvy buyer, you should always ask the art dealer or gallery salesperson if the piece of art you are interested in is consigned or purchased

    Usually, if the artwork has been consigned there is no extra gallery markup to permit price negotiation. If, however, the dealer owns the artwork outright and needs to turn over the inventory, there is sometimes an opportunity to bargain for a better price. This is not, however, the same thing as a "discount".

    This idea of bargaining for a discounted price brings up an important point. Most of us know that there really isn't such a thing as a "free lunch" in the world today. But everywhere we look in the retail business world we see signs, banners and advertisement displays announcing that a "BIG SALE" is taking place. If the truth were known, most of these sale items are for merchandise that was probably priced too high (and thus didn't sell) or the merchant simply bought too many of the items and is stuck with excess inventory. A painting or a marble sculpture, however, is not the same as a used car or a toaster.

    Most legitimate, long-established art galleries do NOT play the game of hiking up a price in anticipation of marking it down, or offering so-called "discounts" from an already artificially high selling price. Successful art dealers know the curent market value of their stock, and price the artwork accordingly. This is particularly true if the dealer expects repeat business from the customers who acquire art from that gallery. Price-gouging doesn't work for very long in ANY business.

    Establishing The Value of Artwork

    What most collectors really want to know is whether or not the prices are fairly appraised market values, not if they can "get it for less." So what are some of the other value factors that help to establish the prices that you will see listed on art gallery title cards?

  • The reputation of the artist is considered to be most important of all. The value of art most often comes down to WHO did it, WHAT was done, and WHEN. An oil painting by Rembrandt done in 1642 is usually worth LOTS of money. The watercolor done last year by your aunt Emily is valued at . . . well, far less.

  • The quality of a particular work in relation to the entire output of the artist is important. On a scale of 1 to 10, where does THIS work stand? Is it from an important period, does it show increased technical or compositional excellence? Always ask to see a biographical writeup on the artist whose work you are interested in acquiring . . . this will often provide tips on where the artist is in his or her career (where they are, where they have been, and where they seem to be headed in their creative careers).

  • If most of the better work of the artist is already in museums or private collections, then his or her remaining artwork will fetch a higher price. Is the artist working in a medium that takes a prolonged time to create (such as stone or metal sculpting), so that less work is available? Does the collector demand for the work of the particular artist exceed the available supply? And is the artist still living, and thus able to produce more work, or deceased so that no further work will be created for the marketplace.

  • Naturally, what is in demand is worth more. However, market hype does not constitute a reliable measure of value.

    Crystal Ball Gazing

    OK, so now you know a few of the factors that can contribute to the "worth" of a work of art. An oil painting that is of museum-quality is obviously worth more than a mass-produced poster print. And most often the more famous the artist, the higher the price. Do remember, however, that good artists can also produce bad art. So you should not buy art solely on the basis of "signatures".

    If you think about it, assigning a value to a work of art is not as difficult as some of the academic "Art Experts" would have us believe.

    Collecting art can be great fun, it can also be a grand adventure. The bottom line is to buy what you love, what appeals to your own personal sense of taste and aesthetics. So, does this mean that we should never think of art as an "investment".

    The policy of the majority of reputable galleries is to never claim that any piece of art will make a "profitable investment"! Maybe YOU have a wonderful crystal ball that shows the future, but I sure don't. None of us can fortell exactly what will happen in the art market. Thus, we simply can't tell a collector that a particular work of art will yield them a guaranteed "profit"

    However, having said that, in this particular economic climate it sometimes makes better sense to switch from having too many dollar denominated assets into "things" which have their own "worth".

    In other words, rather than hold onto a depreciating asset like the $US dollar, it might be much better to invest in a "store of value" like certain fine art.

    Once again, the collector must always be careful to ONLY buy what he or she likes, what is appreciated. Ah-hhh, But have you ever though about the fact that the word appreciate has two meanings; one is "to enjoy", the other definition is "to increase in value". And it is quite obvious that the value of the artwork of many artists has indeed APPRECIATED over the years, sometime quite dramatically. So let's talk for a moment about the "investment" aspect of fine art?

    Art As Investment

    First, let's nail down a couple of terms. An "art investor" is simply a collector who buys art with the anticipation of an eventual increase in the value of that art . . . if he or she acquires the right kind of art and holds onto it for a sufficient length of time.

    A "collector" is anyone who acquires art. There are different levels of involvement as a collector, ranging from the more serious collector who specializes in a specific kind of art object to the casual and infrequent buyer ... who doesn't seem to know much about art, and buys only what he or she likes.

    This last type of collector does not purchase artwork with the idea of "making money." However, like most of us, this kind of art buyer secretly hopes that what they acquire will prove to be a winner and perhaps skyrocket upward in value over the years. After all, in this crazy ecomony it's nice to know that a few things we purchase won't lose all of its value in a few years.

    Not everyone, however, agrees with using art to turn a profit. There are museum curators, media art critics, and art history scholars - the elitist portion of the art world - who totally debunk art ownership for investment. "One should collect art only for one's intellectual and sensual enjoyment . . . Spiritual enrichment should be the true goal of collecting art."

    Hm-mmmm! Tell THAT to the savvy thirty-year-old collector who picked up a couple of Andy Warhol's "Marilyn Monroe" prints a few years ago (when Warhol was just some weird-looking NY guy wearing a cheap blonde wig, who mostly painted soup cans).

    Hey, would YOU turn down a 3,400% return on your investment, just because the artwork you acquired didn't "spiritually enrich" you? You liked it and it was affordable, so you purchased it. The fact that it turned out to be a superb investment was simply iceing on the cake.

    The single most important thing for us to remember about discussing the subject of "investment" is that no one can ever promise an increase in value! You simply cannot guarantee the down-line value of any work of art. No one can!

    So-oooo, does this mean that artwork never be discussed as a "good investment?"? Well of course not!

    The question you have to ask yourself is whether you are discussing art investment as a:

  • Speculative Investment: (betting that the artwork will yield a profit in the immediate future),
  • or if you mean "investment" as a:
  • Preservation Of Capital: (expecting the artwork to maintain its value in the forseeable future with a potential profit down-line.)
  • What Is Investment-grade Art

    Let me ask you as question: "Have you ever considered the benefits of collecting the kind of artwork that yields pleasure AND profit?" Have you thought about selecting your next art aquisition not merely as a 'decorative' expenditure, but as something that provides beauty and enjoyment in your life at the same time as the artwork is serving as an appreciating asset in your investment portfolio?"

    Ah-hhhh, but what kind of art offers this kind of solid investment potential? Where can you find it? How would you pay for it? And then, later on, how could you sell your investment to realize a profit?

    On the following pages, I've tried to cover some of these questions. You'll find strategies that are used by professional collectors and investors . . . the people who buy art that THEY can appreciate, even while the art itself is appreciating in value. Is'nt that really what we would all like to do?

    How Do You Select The "Right" Art For Investment?

    Art dealers and collectors use several buying strategies. Some advise purchasing paintings and prints of established masters, such as; Rembrandt, Raphael, Vermeer, Renoir, Matisse, Picasso, Chagall, etc. Other experts suggest that you will get "more bang for your art-buck" by investing in young emerging artists. Occasionally, you can find very fine work being created by young, relatively unknown regional artists. Buyers will thus have the opportunity to obtain good value at bargain prices . . . if the art buyer invests in the work of exceptional artists BEFORE they reach the peak of their career potential.

    Whatever your strategy, most art professionals agree (as do I) that you should purchase only what YOU like. If the value goes up, well then you've made an intelligent investment. If it does not, then you and your family can still enjoy the aesthetic pleasure that prompted you to buy the art in the first place. And the icing on the cake is that in either case you will still have something valuable to show for your money.

    Tell me, have you ever framed and hung a stock certificate on your wall, and treated THAT as a piece of valuable art?

    Thanks, IRS

    Our US government has established a tax "loophole" that actually encourages donations of art to museums and non-profits. The only requirement is that you hold onto the artwork for a year and a day, and that it be donated to a qualified entity. This little gem of an investment vehicle is based upon a widely used tax law that permits an art "collector" to purchase the art at a very low price, hold the art for an appropriate length of time, then donate it at the higher retail "fair market" value.

    In our often hyper-inflated art market, you can pick up a piece of art from a newly emerging artist, hold it for five or six years, then when that artist's retail prices have appreciated to much higher levels you can donate the artwork for the currently appraised retail value to a qualifying non-profit . . . walking away with more in tax savings than you could probably derive with an outright sale of the artwork.

    Individuals, corporations and estates can use charitable donations of art as part of their tax planning. The main difference is the limitation on how much one can give. Individuals can deduct 20, 30 even 50% of their adjusted gross income in the year of their donation, and may carry any excess forward or backward. Corporations, on the other hand, are limited to 10%, and estates have no limits at all. Of course, each situation is different, and the collector must rely upon the advise of his or her CPA or tax specialist.

    As you can see, there are several ways to realize a profit from an art investment. However, one of the best uses of art is as a "store of value", a preservation of capital . . . even as you are enjoying the artwork in your home or office.

    How To Hold Onto What You've Worked So Hard To Make

    Let me ask you a question. Do you actually believe that there will NOT be continued dramatic changes in our economy in the days ahead? With the Dow and the NASDAQ girating madly up and down, so much of our hard-earned savings already lost to rampant inflation, and a full-blown recession and probably a depression staring us in the face, there is good reason for doubts about our economy.

    Howard Rehs, of the Rehs Galleries in New York City, recently put it this way: "when it comes to the art many of us own, we can all agree it is very comforting to know that when we wake up in the morning and turn on the television, nobody is telling us that one, or some, of our paintings missed their "whisper number" by a penny or two and are going to take a pounding that day. We can just sit back and enjoy our art without hearing about its impending decrease in value, or the possibility that someone is going to make a hostile takeover attempt, or 'take it private', and we will lose one of our prized possessions to some private equity firm.

    "Over the long run a diversified portfolio of high quality stocks and/or art will bring its owner a good return ... however, the ability to visually enjoy your art is a benefit you can almost never derive from your stocks - unless you decide to frame and hang the certificates in your living room; but who even gets their certificates today? All I get is a statement from my broker with a bunch of symbols and dollar amounts -- which are as predictable as the weather."

    I rather like the part about hanging stock certificates on your wall. However, there is a far more serious aspect to all of this . . . the preservation of your personal net worth.

    Do you find yourself worrying a bit about the future; not so much about how you are going to MAKE money, but how you're going to KEEP what you have worked so hard to earn? Well, that's exactly what most of us are thinking about when we consider whether or not to purchase artwork. In other words, do we really want to spend the dollars in our purses and billfolds for a piece of art . . . or hold on to them?

    Hm-mmmm? What about those dollar bills we are carrying around, the ones that we worry so much about spending, the dollars we value so highly. Well, the U.S. dollar bill is undoubtedly one of the most liquid forms of wealth in existence. It is, as you know, the Reserve Currency of the world! But hold onto a paper dollar for any length of time these days and you will wind up with a depreciating asset.

    For this you can blame world-wide economic fluctuations, currency speculation, our grotesque trade deficits, Mr. Greenspan's (and now Dr. Bernake's) Federal reserve interventions, and cyclical inflation. It may appear to be under control, but inflation is very much with us. One and a half percent here, two percent there . . . and before you know it that dollar bill of yours is worth a lot less today than it was a few years ago.

    It is really amazing when you stop to think about it.

    In the past twenty-five years or so, our dollar has DETERIORATED in value by some EIGHTY-FIVE PERCENT! Today's dollar retains just 15% of its 1975 buying power. Since 1900? The Federal Reserve "dollar" has lost almost ALL of its value!

    Think about that!

    If someone had told you in 1975 that gasoline would rise some 1,450% (remember, in the 1975's gasoline cost us only 25 to 30 cents a gallon) or that the cost of a single family home would increase 1,785% (back in 1975 the average new home sold for less than $25,000) .... or that a Volkswagon that originally cost only $1,800 in 1975, would be selling for $25,000 in 2000 (the price of a brand new HOME in 1975!) .... well, you would have written them off as a lunatic, wouldn't you? But that's just exactly what has happened.

    Despite what our government statistics tell us, our inflation has actually gotten worse! You don't need to look far for the real truth. As recently as 2000, you paid only $273 for an ounce of gold. Today, you're paying more than $900. Back then, you also paid only a little over $1 for a gallon of gas. Today, we are already paying more than $4 here in Hawaii. Back then, even a barrel of oil cost only $22. Now we pay well over $100 per barrel.

    Rising fuel, wheat and soybean oil prices have caused the cost of food production to spike, and product prices are expected to jump another 15 percent in 2008 after they rose nearly 5 percent in 2007, according to U.S. Department of Agriculture data. And now we find that flooding in the Mid-West will destroy some 15% (o more!) of the corn production for the 2008-2009 growing season. What do you think THAT is going to do with the already inflated cost of food?

    Hey, you can see where I'm going with this. These dollar bills in our wallets and purses are depreciating in value every single day. Even more to the point, it means that we should be looking around for better "stores of value" than pieces of paper with pictures of dead presidents! Is the Federal Reserve fiat currency going to be DEAD in a few years, as many are predicting? I don't know. Or how about the predicted hyper-inflation that will reduce the value of your purchasing power even further ... dramatically further.

    And this raises an interesting question:

    "If the U.S. dollar declined by 85% (or more!) in the last twenty-five years or so, what will it do in the NEXT 25? ... or even the next 5 years?"

    So do you really want to hold a wallet full of dollar bills, or would it be more prudent for you to place some of those dollars in a good, solid, store of value . . . a preservation of capital, such as certain kinds of artwork offer?

    Obviously, not every work of art is going to qualify as a means of capital preservation. What specific kinds of art ARE considered to be heirloom-quality investments? Well, that's the subject of another commentary. However, if you visit us at our Hana Coast Gallery, we will be happy to discuss this subject with you at greater length.

    A Final Word

    I would hope that all this attention to the investment aspect of collecting doesn't obscure the true value of fine art. Art concerns beauty, passion, drama, memory, and other intangibles. You buy a work of art because of how it makes you feel, what it means to you on a personal level. The appreciation of art should always be a very personal and emotional experience.

    But this doesn't mean that you shouldn't also know the "insider" tricks of being able to understand the marketplace value of a work of art that attracts you. And it certainly doesn't mean that you shouldn't invest wisely in the kinds of art that can serve you as a preservation of the capital that went into the purchase. I hope that you understand this a little better for having read our brief commentary.

    If you feel that you don't know enough about art, then start visiting galleries and museums so that you can develop your own "eye" for quality. Ask questions. Start right here with our Web pages and the information you'll find, click your way around the Internet. Read books. Engage art dealers and gallery art consultants in conversation about the type of art that you are interested in acquiring.

    The "Art Dealer" and "Art Consultant" usually work with a smaller number of collectors than does the gallery salesperson, and represents fine art that can be in a much higher price range. The Art Dealer/Consultant may not have his or her own gallery, and those who work outside of a gallery affiation are called "Private Dealers". They all have one thing in common: their job is to consult with you about your needs and desires, help you acquire the artwork at a fair market price, and make sure you get all of the necessary documentation (Bill of Sale, Certificate of Authenticity, Disclosure of the Edition for prints, Insurance Valuation, and a Biography of the Artist which helps an appraiser determine the downline re-evaluation of your artwork).

    In these unsettled economic times, it's vital for you to know the true worth of your financial "Store Of Value" investments . . . before you spend your money to buy something. This is especially true with the acquisition of fine art.

    You do NOT need some "expert" to educate your personal taste when it comes to art. You already know what you like. But perhaps you don't feel comfortable about knowing if you are paying the "right" price for what delights your eye. What's usually needed in this case is a trusted advisor to help you with the necessary due diligence of valuation. And that's where The Hana Coast Gallery comes into the picture.

    If you visit our gallery in Hana on the Island of Maui, Hawaii, we would be delighted to discuss this subject of how to buy art with you in more detail. If you have a specific question about something you have read in this commentary, please feel free to contact us by e-mail through the link below.


    (NOTE: This commentary was written by Patrick Robinson, the now retired founding partner and former managing director of Hana Coast Gallery.)

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