DEFINING THE APPRAISAL
Victor Weiner, former Executive Director,
Appraisers Association of America

 


 

What is an Appraisal?

An appraisal has been defined in many different ways in a variety of contexts. Generally speaking, it is an opinion or statement of value.That statement of value can be conveyed in several manners and once it is transmitted to a third party it becomes the “appraisal report.”Reports can be written, the most common and preferable mode of transmission, or oral. When a report is rendered by a professional, i.e.,one who holds himself or herself out to the general public as such, that statement of value can be considered to be a legal document or report. Legal accountability for reports in which values are stated, rendered by professional appraisers is generally different and more stringent than the accountability for those who area not professional appraisers, such as collectors, conservators, museum curators or even auction house employees, et al., since it is often assumed that a report given by an appraiser can be relied upon by third parties while statements of value rendered by non-professionals do not have the same level of reliability.

 


What are the differences between an inventory, a “laundry list”and a qualified appraisal?

 

All of these terms have been used in one form or another to describe the listing of property. When a value is attached to such a listing, it becomes an appraisal. Whether it is a complete appraisal in the broadest sense and one on which others can rely, is another story and depends upon the specific work product.The term qualified appraisal generally signifies an appraisal, a complete descriptive listing of various objects with an evaluation which conforms to specific standards set by authorities entrusted by the public to set such standards.The specific term “qualified appraisal” is used by the Internal RevenueService (IRS) to mean appraisals which conform to IRS standards. The most complete and specific IRS standards for qualified appraisals are contained in the rules and regulations for donation purposes but there are also specific qualifications for IRS gift tax and estate tax appraisals, as well.

 


Why is an appraisal necessary?

 

Appraisals are generally requested by clients who wish to know the value of property in order to make certain economic decisions. In personal property, it may be to know the value in order to obtain the proper insurance coverage or in order to make certain decisions about the eventual division of property of an estate. Clients have specific reasons for wanting to know the value of property. It is important that the appraiser understand the purpose of the appraisal he/she has been requested to do, and that the client agrees that the purpose is the correct one. Since values may differ according to the purpose of the appraisal, this point must be completely understood by both parties.

 


What are the different types of value? Is value always thesame? If not, how does it differ?

 

Different purposes for appraisals mandate the application or use of different values. There are four general different types of value for the major purposes of appraisals. Before a discussion of the different types of value can be made, it is important that one realize a general principle of appraising and pricing: values and prices are generally set between two parties, the buyer and the seller, who are sometimes referred to as “the willing buyer and the willing seller.” The needs and the motivations of these two parties are the dynamics that determine value.Generally, the highest value used in appraising is “replacement value.”This value is most commonly used for insurance purposes and is found in insurance policies. It has been defined by the AAA (Appraisers Association of America) as “the amount it would cost to replace an item with one of similar and like quality purchased in the most appropriate marketplace within a limited amount of time.” In such a situation the buyer who has experienced a loss would be motivated to replace the lost item with one that is as close as possible to the item inquestion. In such a circumstance, the buyer would not be expected to wait a long time for a bargain to appear or to engage in an extensive shopping expedition. The buyer would be expected to go into the market and find the best replacement in a short amount of time, and for this convenience the buyer would be expected to pay a high price.Consequently, replacement value is generally the highest value for an appraised object.‘Fair market value” is a valuation term and principle favored by the IRS. It is defined as “the price that property would sell on the open market between a willing buyer and a willing seller, with neither being required to act and both having reasonable knowledge of the relevant facts.” In application, it is calculated from the point of view of the seller: i.e. how much would a seller actually receive if he or she were to offer the object for sale. In using the example given for replacement value, fair market value would be the price the buyer would actually receive if he or she wereto sell the newly purchased object at a later date. All experienced know that in such a case, they frequently will receive less money than was originally paid, especially if top price had been paid for the item in question. As a result, fair market value is most frequently a lower value than replacement value. One should bear in mind an additional factor when contemplating fair market value. The IRS has determined, and had been backed up in the courts, that fair market value is a gross value and includes the sales commission and the buyers premium when the seller uses an auction house or a dealer as an agent for the sale.The next value on a descending scale is “marketable cash value”, which has been defined as “the value realized net of expenses by awilling seller disposing of property in a competitive and open market to a willing buyer, both reasonably knowledgeable of all relevant facts and neither being under constraint to buy or sell.” This definition bears great similarity with the one for fair market value, but the essential difference concerns the term “net of expenses.”The term net of expenses is most frequently used in equitable distribution situations such as divorce. In those cases, one partner would be willing to sacrifice cash for the right to receive total ownership of the personal property in the domestic partnership. However, that partner or spouse needs the assurance that should heor she decide at some point to sell the property the money received for the sold items would be close to the amount of cash sacrificed originally for exclusive ownership. Consequently, the value used in the appraisal should be net of any sales commission or fee connected withthe sale of the property. In calculating marketable cash value, and fair market value for that matter, the concept of time is a very important operative factor. The seller needs enough time to sell the property properly, which should be factored into the appraisal to guarantee an orderly sale. On the other hand, there are instances when one cannot wait the time necessary to market the property properly. This frequently occurs in abankruptcy situation where creditors are anxious to receive some cash settlement. In such instances, the creditors may be willing to acceptsomething less than full marketable cash value for the convenience ofreceiving cash in hand immediately. In such circumstances, a new type of value is required and this is called “liquidation value.” As defined by the AAA, it is “the price realized in a sale situation under forced or limiting conditions and under time constraints. This action may be initiated by the owner orthe crediting institution.”In sum, the four major types of value by personal property appraisers in descending order and the most common purposes in which they are used are: replacement value for insurance purposes; fair market valuefor IRS purposes; marketable cash value for equitable distribution; and liquidation value in bankruptcy situations.

 


What should an appraisal contain?

 

Over ten years ago, in an effort to simplify an understanding of appraisal requirements and in an effort to provide a guide to the general public and the professional community, the AAA published the Elements of a Correctly Prepared Appraisal.This document is updated periodically and today it has over thirty elements divided into sections addressing what all appraisals should contain and those supplementary elements which may be required in some appraisals.In addition, the federal government may impose supplemental standards which then become required elements and must be included in the specific appraisal. The elements included on the list are drawn from published IRS requirements and from other sources such as ad hoc insurance requirements.



Is an appraisal a certificate of authenticity?



Appraisals are not by any means intended to be certificates of authenticity. The appraiser is most likely not the one to make the primary determination of authenticity, unless, in the rare instance, that he or she is a primary authority in the field and others in the marketplace would respect his or her word as one of the primary determining factors in accepting a work in question as authentic. Most of the time this will not be the case and then the appraiser will rely upon third parties through personal consultation or from a published text. Third parties can include scholars, museum curators, conservators, descendants of the artist, associates of the artist or, perhaps, the living artist. Published sources can include catalogue raisonnes, exhibition catalogues, auction catalogues, certificates of authenticity, et al.

 

 


 How often should a collection be valued?

 

Conventional wisdom calls for a collection to be valued every three to five years, however, each collection has its own unique profile.If the objects in the collection fall into a category which can be considered to be “volatile”, one may consider revaluing the collection more frequently. For example, contemporary prints were avidly purchased for ever increasing prices during the late ‘80’s. The market became depressed and prices dropped significantly – in some cases to even one fifth the value of a few months before. If a type of object is subject to such volatile shifts of value, the appraiser and the client should consider a revaluation more frequently than once every three years.


 

 

How do appraisers charge?

 

Most charge according to the time spent on the job and the time spent can be calculated on a per hour or per diem basis. Billing factors such as time spent on site and time devoted to research and report preparation are included in the final invoice. In the instance that unexpected factors may cause the assignment to take longer than initially anticipated, the client should be informed. All professional associations prohibit their members from billing a client based upon a percentage of the appraised value of a collection. A percentage billing rate is also prohibited by the IRS and billing in this manner will automatically preclude the use of such an appraisal for IRS purposes.

 


 

Who can write appraisals?

 

For personal property appraisers, there are no governmental licensing authorities. Consequently, in an effort to gain the credibility and the recognition that they deserve, some personal property appraisers have joined professional associations which bestow professional accreditation in the form of granting membership after one has passed careful scrutiny or in granting certification once the appraiser has been tested.The credentials that one achieves through recognized associations have now taken on extreme importance. Clients have become more discriminatory than they used to be and are now asking appraiserstheir membership and certification affiliation. It is not uncommon today for insurance companies to require that a client employ a certified appraiser. The IRS looks upon such affiliationas partial substantiation that the appraiser is truly qualified. And, should an appraiser be hired as an expert witness or required to defend an appraisal in a court of law, professional accreditation is now an extremely important component in demonstrating professional competence.

 


 

Where are appraisals conducted?

 

Appraisals can take place either on site or at another location where photo images of the works to be appraised are used, when it is not possible to conduct a hands-on inspection.

 


 

How does one become an appraiser?

 

Essentially one must bring to this profession a thorough knowledge ofthe market and the ability to articulate this knowledge in a report that contains all the elements necessary for others to rely upon it. Consequently, a truly professional appraiser must have both intense market knowledge and a true mastery of appraisal methodology. There are no short cuts to attaining both skills which come through years of training and dedicated application, which is associated with a profession that requires a life-long commitment.

 


 

What are the standards appraisers rely upon?

 

There are several standards which are pervasive today in the profession of appraising. Most professional appraisers rely upon the Uniform Standards of Professional Appraisal Practice (USPAP) of the Appraisal Foundation. The Appraisal Foundation is an organization in Washington, D.C. which oversees all appraisal disciplines. Founded in1987, the Appraisal Foundation was awarded increased prominence in1989 when Congress named it as a source for appraisal standards and appraiser qualifications in the aftermath of the savings and loan crisis. In order to be a USPAP certified appraiser, one has to take a course and pass the required examination on a regular basis. USPAP is now endorsed by all major appraisal organizations. Clients who use the services of appraisers that adhere to USPAP will be assured that the reports produced can be relied upon for whatever purpose they are expected to fulfill.