Appraisal Basics – Types of Appraised Values
Different Kind of Appraised Values
One might think that we appraisers use one definition of value or cost that is applied uniformly to all our personal property appraisals.
Nothing could be further from the truth! There are several different types of appraised values or cost definitions used in our industry depending on the objective or intended use of the appraisal or even on the location of the appraised item. For example, it would make no sense to use a salvage value to determine the cost to replace a fine painting. You would want to be able to replace that painting with a comparable one from the same artist and have the full cost of that painting paid for by your insurance carrier.
We will help you to understand which type of appraisal values or costs must be used for your unique situation.
First, it is important to note that there is a fundamental difference between the meanings of value and cost. Value is the monetary worth (as of a particular point in time) which an informed purchaser typically exchanges for an item of personal property, taking into consideration a given market. Cost is simply the amount of money paid for an item. Cost is also often also different from price which is the amount of money being asked for an item.
The rules aren’t hard and fast, but here are a number of the values and replacement costs used in our appraisal assignments.
Actual Cash Value/Actual Value/Cash Value:
This is a term used in the insurance industry to describe the amount of compensation the insured would recover in the event of a loss. It considers an item’s condition and depreciation and is synonymous with replacement cost less depreciation.
Fair Market Value:
Fair market value is defined in Treasury Regulation §1.170A-1(c)(2) as, “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Treasury Regulation §20.2031-1(b) expands upon this definition to say that, “Fair market value is not to be determined by a forced sale . . . nor is the fair market value of an item to be determined by a sale within a marketplace other than that in which the item would be most commonly sold to the public. . . taking into consideration the location of the item where appropriate.
This is a type of market value that depends on the reason for the liquidation such as the distribution, division, sale or conversation to cash of personal property, business assets or inventory by settlement, agreement or legal process. Liquidation values assume there is some amount of duress in making the sale. It may be based on an orderly liquidation value if a period of a few months is available to make the sale or a forced liquidation value if the sale must take place usually in under 30 days.
Market value is defined by the International Society of Appraisers (ISA) as the most probable price that a buyer will have to pay and that the seller is most likely to receive, for an item of property within the defined marketplace at a particular point in time. There are several kinds of market value used for different types of appraisals including forced liquidation value, orderly liquidation value, salvage value, scrap value, marketable cash value, actual cash value, net value, value in use, or value in place.
Marketable Cash Value:
This is the amount that would be netted by the seller of an estate after all costs associated with the sale such as advertising, commissions, transportation, and photography were deducted. It is used by the IRS to value items sold in an estate as opposed to property held or bequeathed which is based on fair market value.
This is a term typically used in divorce cases to indicate the market value of marital property less any encumbrances such as liens or debt or expected selling costs that would serve to reduce the property’s market value.
Replacement cost is an insurance term meaning the amount of money one might be expected to pay to replace a property that was destroyed, stolen or damaged. Replacement cost is further subdivided into replacement cost new, replacement cost new less depreciation, replacement cost used (or comparable), reproduction cost, production cost and buyer’s cost.
Salvage value is a type of market value and is the amount that could most probably be obtained by dividing the property into its component parts and sold separately as is.
This is a type of salvage value in which even the component parts have no value except for the materials from which they were made.
Value in Use:
This is the value of property taking into consideration the extent to which the property contributes to the personal needs, satisfactions or requirements of the owner. It generally increases the value of the property based on it having some unique use or meaning to its present owner.
Value in Place:
This is the value of property taking into consideration the extent to which the property contributes to the success of an enterprise. Examples might include a printing press or stove hood that might not have significant value were they not “in place” but would represent a tremendous loss should they become damaged while in place.
Clear as mud? We’ll help you to understand the type of value or cost that must be used in your personal property appraisals.
All appearances aside, appraised values and costs are not normally precise measurements. Instead they are professional opinions supported by relevant facts and a thorough and systematic analysis and processing of those facts.
It is very common for our client’s dearly collected treasures to have a value significantly lower than they might expect or hope. There are several market pressures that are the cause of these reduced numbers including property wear and tear, upgraded models, over supply of suitable substitutes or the changing taste of buyers. While we honor and respect the sentimental value that may accompany ownership of such an item, our appraised values cannot take that into account. They must instead be based on the objective and unbiased evaluation of the item’s tangible value characteristics and the most recent and relevant available market data for it!