Equipment Appraisals

Appraisals - Beyond Real Estate

Whenever I am asked what I do for a living, my response is; “I’m a machinery and equipment appraiser” which frequently generates a look of amazement followed by the comment; “ I didn’t know anyone did that!” Most people are familiar with real estate appraisers but are not aware that there are a number of other appraisers out there who possess professional expertise in a variety of areas.

Currently, there are five basic appraisal disciplines; real property, personal property, machinery and equipment, business valuation and gems & jewelry. Each discipline maintains its own qualifications and standards for membership. Within each discipline there are likely a listing of specialties. For example, machinery and equipment has several specialties including; aircraft, computers & high tech property, cost surveys, machinery and equipment, marine survey, mines & quarries, oil & gas and public utilities. 

Most appraisers belong to a national organization that grants accreditations based upon one’s level of education, experience, background including financial and personal integrity and the successful completion of several appraisal courses and exams. Only after all these requirements are met is the appraiser granted a specific designation in his or her specialty. Lastly, most appraisal organizations mandate their members reaccredit every five years via continuing education in order to assure that everyone is current with the most recent techniques and developments.

There are several national appraisal organizations including; the American Society of Appraisers, The Appraisal Institute, the American Society of Farm Mangers and Rural Appraisers, the International Society of Appraisers and the National Association of Independent Fee Appraisers, to name just a few. For the record, I am a member of the American Society of Appraisers, which is the oldest, and only major appraisal organization representing all the appraisal disciplines.

There are any number of reasons why an appraisal might be necessary, they include; financing/collateral; business mergers, acquisitions & liquidations; charitable contributions; eminent domain, probate; property settlement (divorce), bankruptcy; estate planning; insurance including disaster planning and tangible personal property tax appeal.

All of these situations require differing approaches to value since it is possible that an appraisal of the same property may result in alternate results depending upon the purpose of the appraisal. For instance, an appraisal of an RV for charitable contribution purposes will be vastly different from an appraisal of the same RV involved in a bankruptcy. 

What is an appraisal anyway? The industry definition is; an unbiased opinion of value. It is important to understand the reasoning behind this definition. The appraiser must be unbiased so as not to show any favor toward the property or the parties involved. In addition, the engagement can not be contingent upon any predetermined result and the appraiser can not possess any past, current or intended interest in the property being appraised. In short, all parties that rely upon an appraisal must be assured that the appraiser is totally neutral.

The word “opinion” is frequently misunderstood within the context of an appraisal. An appraisal is not a guarantee but an indicator of the “most likely” result of a sale that closely resembles the purpose of the appraisal. For example, the sale of a business may result in an appraisal at Fair Market Value while a bankruptcy of the same business may conclude in Forced Liquidation Value. In addition, the appraiser, without interference, must be able to determine the specific approach to value being employed. Since this decision is the sole province of the appraiser, the result is a researched personal opinion.

There is a large number of value concepts which appraisers may employ with two of the most commonly used being; Fair Market Value and Forced Liquidation Value. Fair Market Value is defined as the result of an arms length transaction between a willing buyer and seller while Forced Liquidation Value is the result of a properly advertised and conducted public sale, with the seller compelled to sell on a as is-where-is basis.

There are several factors taken into consideration when appraising property. For example, in order to properly value a motor vehicle, the appraiser must consider the manufacturer, model, year produced, usage, overall condition, attachments and accessories, market demand, obsolescence and current market conditions. This is the purpose behind the physical inspection that is usually required prior to issuing any opinion of value.

As a result of the Savings & Loan crisis back in the late 1980s, the US Congress formed the Appraisal Foundation in order to establish appraiser qualifications and standards. The end result is the “Uniform Standards of Professional Appraisal Practice” or “USPAP.” These standards have been adopted by the federal government and all 50 states. All federal and most state agencies require that appraisers comply with USPAP. 

Whenever engaging an appraiser, it is prudent to confirm both his designation and membership in good standing with a professional appraisal organization followed by a determination of the appraiser’s expertise with the property being appraised. Your project and your organization deserve nothing less!

Introduction

The appraisal industry and its varied services often seem complex and confusing to those who are in need of professional appraisal services.  This blog is intended to reduce and hopefully, simplify the process for those potential users of appraisal reports.

Initially my postings will discuss the simplest of issues and eventually move toward the more complex.  It is my hope that thru this blog and perhaps even your inquiries, a greater understanding will be gained of the appraisal practice and especially those who appraise tangible personal property, especially machinery and equipment.

THE APPRAISAL PROCESS

It may surprise you to learn that, outside of real property, anyone can call himself an appraiser.  Unlike real property appraisers, there is no state licensing for personal property appraisers at this point in time, anywhere in the U.S.  So if you need an appraisal, it is your responsibility to determine if the appraiser is qualified.

There are two types of property: real property and tangible personal property.  Real property includes real estate, land and buildings.  Tangible personal property includes movable items of all types: commercial machinery and equipment, trucks, buses, office furniture.  This category also includes antiques, collectibles and fine art.  This article deals strictly with appraisers of commercial machinery and equipment.

What’s it worth?  That all depends.  Is the purpose of the appraisal for insurance coverage or a claim?  Liquidation? Sale or purchase of a business? Equitable division of property (divorce or distribution of an estate)?  IRS obligation (probate and estate tax or charitable contribution)?  Property tax appeal? Eminent Domain valuation?  The value of a certain item may differ depending upon the function of the appraisal and the “market” used to determine the value.  A knowledgeable appraiser should be able to explain these differences to you. 

Prior to any engagement, ask the appraisers you are considering if they specialize in the types of items you need appraised.  You wouldn’t visit a podiatrist for a heart problem, don’t engage a fine arts appraiser to value a Mack truck.  Verify any appraiser’s experience and certification in the area you need appraised.

Be sure to check the qualifications of the appraisers by asking if they have any formal education in appraisal theory and principles.  Do they comply with the Uniform Standards of Professional Appraisal Practice?  Do they adhere to a Code of Ethics? Do they continue to take classes and pass exams necessary for re-certification?  Most appraisal organizations require their members to comply with their Code of Ethics and re-certify every few years.

Confirm that the cost of the appraisal will be based upon on hourly rate, a flat rate or piece rate.  Are expenses included?  It is not ethical for appraisers to charge based upon a percentage of value or on a contingency basis.

The appraisal report must be clear and discuss all factors relevant to the value conclusion.  All appraisals must be defensible in court.  The report should contain a cover letter, a statement of limiting conditions, the appraiser’s qualifications, a complete and accurate description of the assets with a defined value for each, the methodology employed, the market analysis and a certification including a statement that the appraiser has no financial interest (past, present or future) in the property being valued.

Always inquire about the appraiser’s membership in any appraisal organizations.  Active participation shows involvement with the profession, peer recognition, access to updated information and a requirement to adhere to a Code of Ethics.

One last item, appraisal science is not clouded in mystery.  If there is anything you do not understand, ask the appraiser.  The appraiser has an obligation not to be misleading, so feel free to inquire about anything you do not understand.  A good appraiser will always take the time to explain the process to you.

In future blogs I will discuss the legal definition of an appraisal, the value concepts involved, the Uniform Standards of Professional Appraisal Practice and other interesting aspects that may serve the reader well if and when appraisal services are ever needed.