Tips for Determining Scrap and/or Salvage Value
Monday, July 26, 2021 in News, Education
The ISA Core Course Manual states:
“Salvage value is the amount that can probably be obtained from a damaged item or for the components of a damaged item.”
“Scrap value is a kind of savage value and is the amount that would probably be obtained for a property that was being broken up to obtain materials. It recognizes the intrinsic value of the materials comprising the original item, e.g., scrap steel in a wrecked car or the gold in damaged jewelry.”
Generally, salvage and/or scrap value are determined in the context of a damage claim, where an item has been damaged during shipping, a move, house flood, or fire, etc. Note that scrap value can be found for a damaged item or an item in good condition (e.g., for FMV). For example, the IRS states that Fair Market Value (FMV) is always, at a minimum, the scrap value of the item, although it may be higher if the item commands more than scrap in the most common market. Salvage value is generally only used for damaged items.
An easy way to distinguish between scrap and salvage is that scrap is generally used for metals. Salvage is generally used for everything else, including fine art. I will first discuss salvage value, including where an appraiser might look for comparable sales, and then move on to how an appraiser might calculate scrap value.
Finding the Correct Market(s) for Salvage Value
Students, and seasoned appraisers alike, often think that salvage value is not applicable to the items they are appraising for a damage claim. I take the stance that there is always a salvage value, even if that value is zero. The key to determining salvage value is understanding the market for salvaged goods, and particularly the market for the specific item(s) you are appraising.
If you do not know where to look for this information, then you need to first consider whether you are competent to appraise the item under USPAP. Remember, if you are not competent, you can take steps to become competent, including educating yourself about the appropriate market(s).
Salvage value is most commonly determined in an insurance claim where there are damaged items.
Determining the right salvage value depends on the extent of the appraised item’s damage, the initial value of the item, and the willingness of the market to accept damaged goods. Ask yourself, “Is there a market for this damaged item?”, “Why or why not?”, and “What would someone pay for the damaged item in its current condition?”. And finally, “If a person wanted to buy that damaged item, where would they look?”
Often it is tempting to say that a damaged item has no value. However, this is often not the case. People buy broken china or torn canvases for new art projects. Or a dealer might buy a damaged painting and have it restored for resale. (Note that this generally works best when the artist is dead as living artists may refuse to do the restoration or potentially “disown” a restored painting as no longer being their own.) Below is a list of examples to help you work through a salvage problem when it comes up in your practice.
E.g., a painting with a hole in the canvas
Whether there is a salvage value beyond zero depends on the artist, the extent of the damage, and the market’s willingness to accept a restored piece. Lots of factors come into play and different appraisers might have different opinions. The key here is to think through these steps, determine your market, find comparables and then write a well-justified reasoning. Assume your painting is by a local living artist and would ordinarily sell in a local gallery for $800-1,000. It is a landscape, and it suffers from a 4-inch tear in the middle of the canvas, smack-dab in the center of the most important portion of the composition. It is clearly not cost-effective to have the painting restored. It is a total loss. Now, you have to determine if the painting has any salvage value. At this price point, it likely does not. The damage is also significant enough that the canvas cannot be reused. Perhaps an artist might cut up the canvas and use pieces of the painting in a new mixed media piece, but this is unlikely. I would probably say that the painting has zero salvage value.
Contrast this with a $1,000,000 painting by a well-known artist that is long dead. Paintings by this artist don’t enter the market frequently and when they do some collectors are willing to overlook some repairs.
The repaired/restored paintings do not do as well, but for some collectors, that is all they can afford.
The painting has a small 1cm tear that can be patched and corrected with professional in-painting. You have been asked to provide replacement cost and salvage value. You have not been asked to provide a repair estimate because a restoration specialist will be doing that. You determine that the replacement value is $1,000,000. What is salvage?
Well, let’s look back at the questions above:
Is there a market for this damaged item? Why or why not?
Yes, most likely.
Collectors are willing to buy damaged pieces, particularly those with good restoration work.
If a person wanted to buy that damaged item, where would they look?
Most likely, they would look at an auction or some other sort of secondary market dealing with damaged items.
While the big auction houses might not handle a damaged piece, it is likely that the regional or local auction houses would. Look for comparables in this market. You might also contact galleries that routinely deal with this artist’s work.
Have they ever sold damaged or restored pieces? What did they sell the items for? What would the dealer pay for the damaged item (assuming they were willing to buy it and have it professionally restored)? Again, the answers to these questions depend on the artist, the market, and the extent of the damage. However, the salvage value of this painting might be $200,000 if a dealer thinks they can have it professionally repaired for $20,000 and that the market would still pay $400,000 or even $300,000 for the restored painting.
Note that the insurance company may ultimately decide to have the painting restored, but that is not your decision as the appraiser. Instead, you are simply providing the requested information – replacement value and salvage value – so the insurer can make its decision about how to proceed with the claim.
E.g., a chipped IKEA plate vs. a chipped 18th-century Chinese export porcelain plate with an armorial on it.
The IKEA plate is relatively easy because it is a common, inexpensive good. Chipped IKEA plates (unless perhaps sold in bulk quantities) likely have a salvage value of zero.
However, a chipped 18th-century armorial Chinese export porcelain plate might still have some value depending upon the size of the chip and the willingness of the market to accept some damage. Most collectors of 18th-century Chinese export armorial porcelain will accept small chips or frits and/or a restored piece. Therefore, you go through the same steps that we did with the painting.
You might have to look at regional or local auction houses for comps. You should ask yourself what a dealer in Chinese export would pay for the piece and what they would have to do with it to make it saleable. Several dealers I know have pieces restored and then sell the item with the restoration, and this is accepted by most collectors (of course, at a lower dollar amount than one would pay for a “perfect” piece).
In general, most collectors are willing to accept a hairline or small chip or well-done repair. We’ve all heard dealers say, “You’d have some damage if you were 250 years old too!)
Even if the plate was damaged beyond that acceptable by most collectors, there might still be a market for the damaged plate. For example, Paul Scott, a contemporary ceramics artist buys damaged transferware pieces on eBay and uses them in his contemporary works. He likely only pays $5-20 for a plate (or buys them in lots), but these comparables would be readily available on ebay.com or worthpoint.com. Read more here.
E.g., a wooden designer desk with water damage to its legs
Assume replacement value for the desk is $3,000, and it has suffered water damage to its legs. An independent repair estimate has come in at $1,500. You have been asked to provide salvage value.
This is a situation where you really need to know that market. You might be able to find similarly damaged items for sale at local consignment or thrift stores, garage sales, on Facebook marketplace, nextdoor.com, etc. There may also be comparables from local auction houses. Similarly, damaged goods may be sold at salvage stores, etc. Often salvage value is a fraction of retail, and often these sorts of items are sold in bulk, meaning that the insurer will get 10 cents on the dollar. However, these transactions do take place. The key is to educate yourself on where to look.
E.g., a Subzero wine cooler that suffers a shortage due to a power surge or a car that is totaled in a car accident
While we might think about the metals being sold for scrap in this instance, the salvage value of the wine cooler or car also includes the parts that might be used to repair other appliances or cars. If a car is totaled and a bumper needs to be replaced (or a speaker system or a dashboard, etc.), then car repair shops will often source those parts from damaged vehicles.
There is a market for those vehicles, and if you are doing that sort of appraisal, you need to know what that market is.
Calculating Scrap Value – A Type of Salvage Value
Metals and other goods that can easily be reduced to raw goods require special treatment. A scrap value for gold, silver, copper, brass, iron, etc., can be determined through a few easy steps.
Assume that your client has a sterling silver bowl that was dented in a move. The cost to repair the bowl is more than the replacement value, and the insurer cashes out the client. Under the terms of the insurance contract, the insurer has the right to keep the damaged bowl (which it does). Now, the insurance company wants to sell the damaged bowl to recoup some of its losses on the claim. The easiest way to do this is to sell the damaged bowl for scrap.
To calculate the scrap value of the sterling silver bowl, weigh it in troy ounces. You can do this using a portable scale. I have the Myweigh iBalance 2600 which weighs items up to two pounds in several different units, including troy ounces (ozt). If you only have a regular food scale, you can also weigh the silver bowl in ounces (oz) and then convert the ounces to troy ounces using Google or an online calculator. Assume that my dented silver bowl weighs 4.2 ozt on my scale.
You can find the current spot price of silver on many websites, but I like www.kitco.com. Note that spot prices are always given in troy ounces (ozt) because that is how bulk silver is traded on the market. Also, note that PURE silver (1000/1000parts) is what is being traded. As of my writing, the spot price was $26.05/ozt for pure silver. There is often a “spread”, i.e. a high/low or buy/sell given. I will often either split the difference or use the most recent buy price. If the effective date of the report falls on a weekend when there was no trading, you can use the closing ask price at the close of the market on Friday. Silver generally does not move so rapidly that it makes a difference, and no matter what you do, simply explain your process.
You can use these three numbers to calculate the “spot” value of the silver bowl:
Spot value of bowl = Spot price ($26.05/ozt) x .925 (because sterling silver is only 925/1000 and not “pure” silver) x weight in troy ounces (4.2 ozt)
$26.05/ozt x (.925) x 4.2ozt = $101.20
This is your spot value, or what the piece would trade for on the commodities market in bulk.
We have been talking primarily about insurance, but scrap value or spot value is usually a good equivalent to fair market value for most pieces of ordinary 20th century American silver. According to the Federal Regulations, “Groups or individual pieces of silverware should be weighed and the weights given in troy ounces.” 26 CFR § 20.2031–6(d). This is because at a minimum silver flatware is worth at least its scrap value.
Why scrap value and not spot value? Because most sellers of silver and gold do not have access to the commodities market.
Instead, most sellers need to sell to a middleman, either a refinery directly or more likely (for an individual consumer) to a pawn shop. The middleman will want his cut (which is typically 10-20% of the spot value). You can call your local pawn shops and ask what percentage of the spot they are offering for gold and silver.
To calculate scrap value, you need to take your spot value and multiply it by the middleman’s margin.
Here is what the scrap value would be if the pawnshop was offering 85% of spot: $101.20 x .85 = $86.02 (scrap value).
Gold works similarly, and there are calculators online which can help you determine both spot and scrap prices.
By Kirsten Rabe Smolensky, JD, ISA CAPP