The strength of the art market is headline news. Every week this year, new records have been set. Prices for limited editions by local artist John Baldesarri have doubled in the past two years. The entire inventory of Christie’s April auction of Picasso ceramics and November auction of original photos by Richard Avedon sold out. This level of success, called a “White Glove Auction” has been mirrored at smaller auction houses and galleries around the world.

The current strength of the art market is often referred to as a seller’s market. This has also increased the frequency of inquiries and direct advertising of private sales of art along the model of “for Sale by Owner” real estate. These sales have a long history, dating back to the Mohawk tribe’s sale of Manhattan in 1624 for a collection of Dutch decorative art. But private sales of art have many drawbacks that are often forgotten at times like this year, when the market is accelerating.

The weakness of the market for privately sold art is measurable. eBay has made a large investment in its eBay Art program, but has not been able to achieve sales volume comparable to any of the established international art sales organizations. Here is an overview of common reasons that private sales of art reduce the value of the art:

1) Art sold privately without the support of an art sales organization often creates the appearance that no art sales organization will invest in advertising, sales training and inventory finance costs for the work of art. The main reason is usually pretty simple -- and a good reason not to buy the art. That is bad reviews by art critics, calling the work the worst piece ever painted by artist X or the most tasteless insult to the region of Y, etc.  The latter just happened again today, when the city of Encinitas voted to remove art some voters considered offensive. 

2) It can be difficult or impossible to obtain a bank loan for art purchased in a private sale. The main reason is plain and inflexible. Commercial banks require that collateral meet tests for “liquid assets.” This means that there is certainty that the asset could be sold in less than one year. If there is no track record of the art having been sold by an established art sales organization, it is not a liquid asset by definition and a commercial bank simply cannot extend credit. There are few commercial finance companies that do make these loans, but they charge a lot, over 20% annual interest, compared to rates of 6% to 8% offered by commercial banks.

3) Art dealers typically provide buyback clauses, guaranteeing that they will re-purchases the art for 100% of the purchase price for a period of one to three years. These details are well documented in the archives of the Norton Simon Museum in Pasadena, which maintain the actual contracts that Mr. Simon signed when purchasing the works in his world famous collection.

4) Inadequate research regarding an artist or a set of works of art often results in a lower price. The classic case is works by the renowned Italian Renaissance artist, Caravaggio. Very little research about Caravaggio’s work was published before the 1960’s. That is not because of his artistic talent, but because Caravaggio was excommunicated by the Catholic Church. As a result, some paintings by Caravaggio sold for under $1,000 during the 1950’s. Today, all original paintings by Caravaggio are worth millions of dollars.

5) Sales of art by private universities are complicated and sometimes result in the sales contracts being invalidated. Yesterday, the New York State Board of Regents announced a decision that it would not provide financial support to any university which sold art that had been donated to the university. Technically, the universities have the right to opt out and dispose of their art if the trustees decide to do this. The reality is that every university in the state of New York benefits from stipends paid by the New York State Board of Regents.

An important result of these factors is that the cost of buying insurance for art purchased in a private sale can be higher and the amount the insurance company will pay if the art is damaged beyond repair will be much lower. Art insurance is not expensive -- about one-tenth of one-percent of the purchase price each year for a large collection. But having the value of a million dollar claim reduced by twenty to thirty percent can ruin your retirement.