Appraising an Appraisal

A Guide for Gatekeepers, Paralegals, Insurance Adjusters & Others

By Leon Castner, Senior Partner, National Appraisal Consultants, LLC

Many professionals encounter personal property appraisals during their work, either receiving them from appraisers they have contracted or given them by others in their firm to review and file.  Not all appraisals are created equal, however, and it takes a little bit of knowledge and expertise to judge whether an appraisal document is all its cracked up to be.  This brief guide will help the layperson critique an appraisal to determine whether it is credible and worthy of belief or off the mark and of little or no value at all-despite what the appraiser says in the report.

There are a few key warning flags that every user of an appraisal document should know.  They are not difficult to spot, and you don’t have to know a lot of jargon or technical “stuff.”  They are indicators of a careless or possible incorrect valuation that may eventually jeopardize your case or create future problems.

1. A Standard

Personal property appraisers should perform their responsibilities and write their reports to a specific standard.  Since there is no licensing of personal property appraisers, much of what has been done in the past has been unjustified.  Many people called themselves “appraiser” but were not trained or tested in either the methodology or principles of the profession.  Their results could have been incompetent, awkward, and downright deplorable, without anyone questioning their work.  This has now changed.

USPAP-the Uniform Standards or Professional Appraisal Practice-have been in existence since 1989.  They have been readily accepted as the norm for both real and personal property appraisers and been recognized as the generally accepted standards of appraisal practice by the major personal property organizations in the US.

At a minimum, all appraisals done by professionals should follow the current USPAP.  You will know because the report says so.  It contains a statement and a certification that proclaims the appraiser was aware of and attempted to be compliant to those standards.  (Whether it was being another judgment.)

In addition, many appraisers belong to specialized personal property organizations or societies, each with their own standards, requiring additional education, training, and testing.  It would be wise to check out the membership claims of any appraiser and then see if the report followed their requirements.

• Value and Use

Every appraisal is required to have a statement of the intended use of the appraisal and the objective of the appraiser.  They must match and be proper for the assignment.  An intended use is a statement declaring the client’s use of the report (what they are going to do with it or why they needed it done).  This could be something like “filing an estate tax form,” “claiming a charitable contribution deduction,” “filing an insurance claim,” “establishing replacement costs for insurance coverage,” etc.  This is important since it sets the stage for how the appraiser will do the job.  It creates an objective.  An objective could be to determine a certain type of value, estimating a certain cost, or calculating the present worth of an object based on future earnings.

The objective is the appraisers job, whereas the intended use is the client’s purpose in having the appraisal done.  The objective must match up with the use so that the amounts are correct, using the proper markets, and doing the applicable research and analysis.  If the appraiser’s objective is not applicable to the use, the values will be inaccurate.  For example, providing estimated replacement costs for a charitable contribution appraisal will not only be inappropriate, it will cause the appraisal to be excluded by the IRS with possible fines and punishment.  (The IRS requires that every charitable contribution appraisal be done using “fair market value”-not replacement cost.)

This is particularly significant in cases of divorce, litigation, and claims where there are conflicting parties to the results.  Although appraisers are supposed to be impartial, unbiased, and trustworthy, there always seems to be two very different opinions of values on the same identical property.  Often the reason is not human error or “wiggle-room” but a case where the objectives were not in line with each other.  One appraiser could have used a different value or cost than the other, making the playing field uneven or incompatible.  This can be seen in the case of divorce where appraisers may be asked the value of either the community or individual property.  One could use replacement cost new, a very high value based on what it would cost to either produce, reproduce, or purchase the item new and the other appraiser using orderly liquidation value, a value determined by auction sales of used property in liquidation situations.  The amounts are not going to be the same or even close.  (They shouldn’t be!)  So, using the appraisal figures for an equitable settlement will not be equitable or fair.  One appraiser may be correct or neither.

A competent appraiser will know what the state law requires in divorce situations and use the specific value set by statue or practice.  So, one appraisal may be correct based on the proper methodology and the other could be woefully inaccurate-even though the document looks good, reads good, and carries a gold seal.

Knowing which objective goes with the corresponding intended use is not an easy task, but it is important.  Here are a few of the most common:

              INTENDED USE                                           OBJECTIVE

• Estate filing                                 Fair market value
• Insurance coverage                   Replacement cost (new and/or used)
• Donation or Gift Tax                  Fair market value
• Bankruptcy                                  Forced sale value
• Family Division                           Market Value (Forced or Orderly)
• Resale                                            Orderly Liquidation
• Claim                                             Depends on Policy or State Regulations
• Divorce                                         Depends on State

• Definitions

An easy way to check whether the stated objective might be applicable is to review any definitions of value or cost included in the report.  An appraiser should provide the statue or regulation that applies in the assignment.  A specific definition should be cited and relate back to the assignment provided at the outset by the client.  For example, the specific definition of fair market value used by the IRS is given in Treasury Regulation Section 1.170A-1©(2).  It is a requirement that the appraisal be done according to that definition.

Another piece of information required in all USPAP reports is the explanation of which approach to value was used in the assignment.  This is relatively simple since there are only 3 approaches to value and they are not in dispute.  There’s the cost, sales comparison, and income approaches.  They explain the exact methodology used to estimate, calculate, or determine the final value conclusions.  An appraiser usually used one per assignment but may need more than one.  This must be stated in every report with a definition of each approach and a discussion of which approach or approaches was used and why, and which ones were not used and why.  This provides a basis and understanding to the reader of how the appraisal was done.  (Remember that the appraisal should be done with both the client and any third party in mind.)

• Support and Justification

Appraisals that are simply laundry or shopping lists are not appraisals.  In addition to explaining the appraisal process and the scope of work done in the assignment, the appraisal must contain a host of information BEFORE it even lists and describes the inventory and subsequent valuation.  However, one might be knowledgeable about the exact elements required in every report.  That’s ok.

What can be reviewed by anyone is the support provided for the valuation.  Does it explain where the numbers come from or which markets were utilized in their determination?  This should be done in a general way in the discussion of scope of work and then in more detail in the valuation section.  Items with particularly high value should show a justification (listing of comparable sales, analysis of those sales, and/or a sound basis for the conclusions).  To be technical, the appraiser must demonstrate a relationship between the market evidence claimed and the object being appraised, considering value characteristics such as rarity, quality, provenance, importance of creator, etc.

To be clear, the amount of detail in the report may be a factor of the intended use.  A report for charitable contribution might lay out a whole argument with multiple comparable sales and an extensive analysis to support a hefty fair market value.  An appraisal for insurance coverage might have a much briefer description of the item with no comparables listed in the document.  Chances are, if you are reviewing an appraisal, then it was meant for a third party and not just the client.  This means that USPAP brands it an “appraisal report”-rather than the other option- a “restricted appraisal report.”  (This should be stated in the report as well.)  The appraisal report option requires more detail and summarization of the appraisal process.

• Qualification

Every appraisal should contain a CV (curriculum vitae).  It states who the appraiser is and why they are considered qualified to handle the assignment.  A “CV” is usually the first evidence tested in a court of law.  It explores whether the training and experience of the appraiser was appropriate to the assignment and whether competency is an issue.

The listing of qualifications should concentrate on the tested credentials of the appraiser and the area of expertise required for the assignment.  Age or years of doing “appraisal” work is not generally a sound foundation.  Successful completion of appraisal courses and the earning of a recognized designation is, especially if the organization credentialing the appraiser is reputable.

No personal property appraisal is “certified.”  It may be done by a person who has been certified by a professional appraisal organization, but the work produced is not automatically certified.  In the same manner, no appraiser is deemed “USPAP compliant.”  Whether or not the work done is compliant is up to a reviewer or trier of facts.  An appraiser may be up to date on USPAP course attendance requirements, but USPAP does not offer credentialing.

This is important because those seeking to impress clients or readers of their reports often use the key words like licensing or certification to avoid the real question of whether they were competent to do the job in the first place.

Conclusion

Appraisals can be reviewed on a formal basis by appraisers who have been trained in USPAP.  In fact, every appraiser who has taken the USPAP classes can attempt appraisal reviews, following standards 3 & 4 (the development and reporting of an appraisal review).  Some are better than others, however, and one would be wise to check out a potential reviewer in the same manner one attempts to hire an appraiser for a valuation.  These reviews follow a plan and are presented in an appraisal format, ready to be used to judge and/or critique the original appraisal.  They are highly recommended.

Before that choice is made, you have an obligation to do some preliminary checking, and that’s what this guide was all about.  If you see a weakness or inadequacy in any of the above areas, it may indicate a serious problem with the appraisal.  Your layman’s critique can form the basis for further action, including contracting out for a USPAP review. Note:  It would be wise for you or your firm to have a current copy of USPAP (Uniform Standards of Professional Appraisal Practice) published by The Appraisal Foundation (www.appraisalfoundation.org) and to acquaint yourself with the rudimentary essentials of appraisal principals and methodology.  National Appraisal Consultants (www,nacvalue.com) has free newsletters, guidance, and courses that may assist you and your associates, even if you are not professional personal property appraisers