Oct 29, 2009

Value Is A Moving Target

As an appraiser, the question I hear most often is: what's it worth? I don't just hear the question at work; I expect to get the question there. I mean I hear it at the mall, in line at the grocery store, at parties, and sitting in the doctors office. What is my antique furniture worth? What's the value of my art? What can I get for my collectibles? In a social setting, I find the question annoying; I feel a bit like the doctor who, when at a party, is always asked for a free diagnosis. To many, I'm sure my answer is equally annoying. I always tell them that it depends.

You see, value is a moving target; it changes constantly. You know from shopping in retail stores that prices are subject to change from store to store and season to season, but when it comes to antiques and collectibles, people tend to think that an objects appraised value is like money in the bank. Not so. The value of an object is dependent on the market demand for the object, the supply of the object, the condition of the object, the usefulness and/or significance of the object, and the circumstances under which the object will be sold. No matter how beautifully made something is, if it's too big, the wrong color, is commonly available, or must be sold in a hurry, the value of the object drops precipitously. Ultimately, the value of an object is what someone is willing to pay for it. What one is willing to pay will vary with how badly or how soon they need it. When would you pay the most for a household generator: when the weather is calm, or when a hurricane is approaching? I'm sure you get the picture. My intent in this article is to give you a broad view of the key valuation aspects involved in an appraisal. In future articles, I will discuss each aspect in detail.

When approaching a personal property appraisal, there are four valuation aspects that an appraiser will consider. First, a description of the object itself, discussing in detail its condition, utility, age, and quality. Secondly, the object must be placed in its historical context. Is the object genuine, or a fake? What is the style? Are the materials appropriate for the time period? Thirdly, the intent of the appraisal must be established. Value cannot be assigned until the purpose of the valuation is known and stated. A value for insurance purposes will be higher than a liquidation value. A fair market value will differ from cash value. Estate value will be lower than divorce value. Lastly, the market in which the object is located or sold will affect the value. Where there are a lot of potential bidders for an object, the value increases. Farm tractors sell better in farm country than in the city, because there aren't any farmers in the city. Consequently, a tractor will likely be worth more in Hillsville, VA than in Los Angeles, CA. This market area aspect of valuation often escapes people who use blue books and price guides to value their objects. If no one in your market area will pay the price listed in the blue book, then the blue book price is wrong for your market area and does not correctly represent the objects value.

Finally, know that appraisals for estate purposes, insurance, divorce and other reasons are all time-sensitive. The value provided is for right then, right there. Don't think that the value assigned will be good next year or the year after, because value is a moving target.

Oct 28, 2009

Appraisal vs. Opinion of Value

On my last Alaska cruise as an art auctioneer, my friend Tamara, the ships' Port Shopping Ambassador, related the following story: a passenger purchased an item of jewelery from a store in Skagway for around $10,000. The following day, the passenger got a serious case of buyers remorse, and sought to return the jewelery on the basis that the item was misrepresented and overpriced. To prove the item was overpriced, she took the item to a second jewelery shop to ask the shopkeeper to appraise the item. The appraisal offered was nowhere near what she paid for the item. In fact, the second shopkeeper told her that she had overpaid, and that she should return the item and then come back, because he could offer her a higher quality item at a lower price.

I'm sure that this situation is as transparent to you as it was to me: the second shopkeeper was trying to make a sale at the expense of the first shopkeeper. That this sales tactic could work is rooted in the passengers ignorance of the difference between an appraisal and an opinion of value. The ignorance of this difference has cost clients of mine thousands of dollars in lost insurance claims and missed opportunities. Knowing the difference between an appraisal and an opinion of value will be to your advantage.

An opinion of value is an opinion offered on the basis of experience and expertise. Such opinions may or may not be valid, depending on the qualifications and ethics of the person offering the opinion. The persons offering such opinions are not required to be independent, impartial or objective. They can, and often do, have conflicts of interest and hidden agendas. An opinion of value has no requirements for documentation or evidence. Those offering an opinion of value are not held to the same legal and ethical requirements as a certified appraiser. Let's say that you took a Picasso etching to an art dealer who gave you his opinion of its value, called the opinion an appraisal, and then offered to buy the painting for the appraised price. The dealer would have offered you no evidence to back up his claim of value, and clearly had a conflict of interest. His opinion of value is worthless.

The value offered in an appraisal, on the other hand, has been researched and evidence is offered to support the value claimed. Most often, evidence is offered in the form of comparable sales; that is, what items like yours have actually sold for recently in your market. In addition, a proper appraisal follows the format of the Uniform Standards of Professional Appraisal Practice (USPAP) which has been authorized by Congress as the source of appraisal standards and appraiser qualifications. USPAP is generally recognized by the courts and by the IRS. A USPAP-compliant appraisal clearly establishes the details of the appraisal, the appraiser, the intent of the report, assumptions, limiting conditions, and all evidence supporting the conclusion. When done, the appraiser must sign and certify the report. Such a report will stand up to legal and IRS scrutiny and the value offered can be trusted.

Now that I've established what an appraisal is and isn't, let me throw a wrench in the works. If you called five appraisers to appraise the same item, you may get five different appraised values for the item. How can that be? An appraiser must make certain assumptions and adjustments in arriving at the value of your item. Unless sales evidence can be found for an item exactly like yours, adjustments will have to be made to compensate for differences in age and condition. Making adjustments is more art than science, and ultimately depends on the skill and experience of the appraiser. Also, the intent of an appraisal will have a bearing on the value. Appraisals for insurance replacement, estate liquidation, fair market value and cash value will all yield different numbers. If the value of your tangible personal property is important for estate, tax, divorce, or other legal consideration, please don't rely on an opinion of value to make your claim. Call a certified personal property appraiser.