It may seem like a silly question, but often the silly questions are the best. What exactly is an appraisal? The answer and its consequences may surprise you, whether you are a professional appraiser, one that uses appraisal services, or just an interested third party.
According to the Uniform Standards of Professional Appraisal Practice, an appraisal is the act or process of developing an opinion of value. To be even simpler, it is an opinion of value. Anytime a “professional” places the monetary worth on an item, whatever the item might be, the result could be called an appraisal. This could be expressed numerically-it usually is, but it could also be rendered as a relationship (“it’s worth more than a trip to Disneyland”).
Most appraisals are done using a specific amount, i.e. it is worth $50.00. Others can be expressed as a range ($50-$100), and still others can be done stating the result is more or less than a specific benchmark. If one states an item is worth more or less than another known item, it also stands as an appraisal.
Let’s be clear. The person providing the opinion must be holding themselves out as an appraiser and is expected to provide their opinion competently and in a manner that is independent, impartial, and objective. Just stating an opinion about the value of an item without those specifications is not really an appraisal. There are lots of people who render opinions about values-most of them without justification or backing. This includes professionals (everyone from attorneys to car dealers), semi-professionals (antique dealers and collectors), and the average person (who probably renders these ideas on a regular basis). It’s part of normal conversation.
So, it seems that the person providing the opinion of value makes all the difference in the world. One calling themselves an appraiser has certain minimal standards and ethical responsibilities when providing their services to the public. This expectation occurs when individuals, either by choice or requirement, represent themselves as such. A used car dealer can offer advice and an opinion of what a used car is worth. That does not make them an appraiser. An antique dealer can offer advice and an opinion on what antiques might be worth, but that doesn’t make them an appraiser either.
There are many people who offer valuation services, but only those who do so as “appraisers” can rightfully call themselves appraisers. This means they hold themselves out as performing valuation services that are competent, independent, impartial, and objective. Let’s look at what these words mean:
An appraiser is one who can identify the problem to be solved and have the knowledge and experience to complete the assignment. It includes not only identifying and placing values on certain categories of items (specialty knowledge), but on knowing the laws and regulations that apply to the assignment. If one was appraising for an IRS donation, the appraiser not only must know the item and its marketplace, but how to do an IRS appraisal, including all the requirements and a completion of an 8283 form. Appraising items for insurance coverage include knowing what types of costs or values are appropriate for proper coverage. Every appraisal has a specific use. The appraiser is responsible for knowing how to value the item correctly for that use and how to write the report. Knowing a great deal about items or their values does not make one competent as an appraiser.
An appraiser is not an advocate or agent for the client or for any third party. They are not connected to the sale of the item. Their valuation is not based on any contingency or hidden agenda. They must state their independence to the client at the commencement of the assignment and in the report.
An appraiser should not be biased or be inclined to take sides. For example, in a divorce appraisal, the appraiser will perform the job without slanting the figures to the advantage of one side or the other. In an IRS appraisal the appraiser will not take the side of the client or the IRS but will perform the job as an impartial expert. The appraiser doesn’t take sides.
An appraiser bases his conclusions on facts and data, not on personal whims or wishes. Proper methodology is used to insure the results are credible and justified, supported by market data and not just one’s feeling or sentiment. Objectivity is proven by the facts. This means a logical, reasoned procedure has been followed to arrive at judgment.
So, appraisers are those who have undergone training and uphold a standard and are ethically bound by professional ethics. These are stated in The Uniform Standards of Professional Appraisal Practice. Those wishing to comply must take courses on a regular basis, at least every 2 years.
The “products” or services that appraisers offer include appraisals. These opinions of value are for specific uses, effective as of certain dates, and only for stated clients and their listed third parties. These opinions of value have two distinct elements: their development and their transmission. Each is present in any assignment and explains how and why things were done.
The development of an appraisal is the process of forming a value conclusion that starts with a client’s problem and ends with an answer or solution to the problem. If a person calls an appraiser and needs a value on a specific item, the appraiser begins a process to provide that value. That process can take five minutes or many hours, depending on the item and the specific use given to the appraiser. Even if the answer is forthcoming in a matter of minutes (seldom done, but possible), the appraiser is still running through the process in their head. This includes the type of value (based on the specific need), the relevant physical and economic characteristics of the property, the methodology or approach to value necessary to produce credible results, a specific marketplace relevant to the assignment, and data to collect and analyze to produce a credible result. (This is just to name of few of the basic steps.) Often this can be done with a quick and logical mind, particularly if the item is common and one the appraiser has extensive experience with, or with a quick and proficient computer search, but normally it takes many searches, phone calls, resources (including a good library), and a gathering of comparable sales or price data from selected and appropriate sites.
The development stage is the actual process of coming to a solution or value. It is the appraisal schematic and of extreme importance. In USPAP standards it is number 7-the roadmap to achieve value conclusions. Without it there is no credible result, despite what someone might claim.
The appraisal has been done. The value conclusion has been reached. Now it’s time for the appraiser to report back to the client and give them the answer. This can be orally-by talking to them or it can be done in writing-an actual document. It doesn’t matter, if all the conditions are met in this communication. In both instances, it is called a “report.”
The report doesn’t simply provide a dollar amount, a range of value, or a numerical relationship. It explains the problem and how it was solved. It states the people involved-from the client (the person who asked for the value) and any person relying upon the result (intended user). It provides the effective date of the valuation (the date on which the values apply to) and the date it was given. It summarizes what the appraiser did, how they did it, and the techniques and methodologies used. It defines the marketplace utilized and provides a justification for the final value conclusion. The person receiving this report, whether oral or written, should be able to follow the appraiser’s thought pattern and map of how the solution was reached.
The final part of this communication is a signed certification (even done if an oral report). It summarizes and certifies what was done and provides the ethical boundaries of the process. It offers the assurance that the appraisal was done competently by a professional who was independent, impartial, and objective.
Anything less is NOT an appraisal. It may be a valuation service by a non-appraiser but can not be considered a professional appraisal. Call it what you will. It’s not an appraisal!