Appraisal experts operate in differing fields of expertise
including Real Property, Business Valuation, Personal Property and Machinery
and Equipment. There are frequent
misunderstandings regarding the appraiser’s function within an appraisal
assignment.
One of the most frequently requested value concepts is “Fair
Market Value”. This concept is best
described as; “the most likely result of a sale between a willing buyer and
seller, in an arms length transaction, both knowledgeable of all facts.”
A key element in this definition is “most likely
result.” The only true indicator of
value is an actual sale. Since most
appraisals are performed prior to a sale, it is rare for an appraisal to
reflect the final selling price of a property. The appraiser relies upon his research of market data reflecting several
sales of same or comparable property in order to arrive at a value conclusion. In comparison the final selling price of a
property has likely been subject to negotiation based upon a number of factors
including emotion.
Imagine a garage sale
with a stereo for sale at $200. A buyer
offers $100. After some negotiation,
both parties agree to $150. One could
say the fair market value of the stereo is $150. However, over the next few weeks, two of the
same or comparable stereos sell for $125 and $250 each. This difference in price could be related to
several factors including: the negotiating skill of the parties, the operating
and physical condition of each stereo, the motivation of the buyer or seller,
the inclusion or lack of advertising, even the weather may play a part.
An appraiser must research and consider all these factors
before arriving at any value conclusion. This is why “most likely result” is often employed because no one can
take all possible factors of a sale into account.
There are any number of varying appraisal values that may be
employed including; Replacement Cost New, Fair Market Value In Continued Use,
Orderly Liquidation Value, Forced Liquidation Value, Salvage Value and
Insurance Replacement Cost. These are
just a few examples of appraisal values. The unique circumstances of each individual situation will determine the
value concept to be employed. A
certified professional appraiser can assist in the determination of the best
approach and value concept to be employed.
In a future posting, I will more fully explain the
definitions of appraisal values and how each can be best employed.
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