Archive for the ‘Appraisal Terms’ Category
Common Definitions of Value for Machinery and Technical Assets
We talk a lot about the importance of knowing the value of your machinery and equipment, but sometimes the language used in the industry can be confusing. It’s also important that you are able to understand what all of the terms mean when you engage a machinery and equipment appraiser. Below are some common definitions for different appraisal values as they apply to machinery and equipment, as defined by the American Society of Appraisers.
Fair Market Value is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, as of a specific date.
Fair Market Value – Removal is the estimated amount, expressed in terms of money, that may reasonably be expected for an item of property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, considering removal of the property to another location, as of a specific date.
Fair Market Value in Continued Use is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date and assuming that the business earnings support the value reported. This amount includes all normal direct and indirect costs, such as installation and other assemblage costs to make the property fully operational.
Fair Market Value – Installed is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date. This amount includes all normal direct and indirect costs, such as installation and other assemblage costs, necessary to make the property fully operational.
Orderly Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
Forced Liquidation Value is the estimated gross amount, expressed in terms of money, that could typically be realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an “as is,” “where is” basis, as of a specific date.
Liquidation Value in Place is the estimated gross amount, expressed in terms of money, that could typically be realized from a failed facility, assuming that the entire facility would be sold intact with a limited time to complete the sale, as of a specific date.
Salvage Value is the estimated amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for possible use elsewhere, as of a specific date.
Scrap Value is the estimated amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.
Insurance Cost New is the replacement or reproduction cost new as defined in the insurance policy less the cost new of the items specifically excluded in the policy, as of a specific date.
Insurable Value Depreciated is the insurance replacement or reproduction cost new less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreements, as of a specific date.
Present Value is always available to answer any other appraisal questions or needs that you may have. Please feel free to contact us.
By: Present Value
Additional Reading:
Know the Value of Your Machinery and Equipment Before an Auction
Case Study: Desktop Equipment Appraisal
Present Value LLC worked on an international project involving equipment being purchased from the United States and delivered to two locations in South America: Brazil and Chile. Due to time constraints, the client requested we perform a desktop appraisal.
Once the client provided Present Value the necessary details, photos, and information on the equipment, we conducted all necessary research and developed the appraisal report. The client was very happy with the appraisal because they got the certified report they needed in the timeframe required.
Because the machinery and equipment appraiser does not visit the site of the equipment being appraised, a desktop machinery and equipment appraisal requires the client to provide the appraiser with all the necessary information for each of the items to be appraised, such as photos, make, model, hours, mileage, years, and original cost. The appraiser then performs an appraisal from his or her desk, as the name implies, based on all the information provided by the client.
By: Present Value
Additional Reading
Common Types of Appraisal Reports
Appraisers Seeking Resources to Determine the Value of Green Buildings
Real estate appraisers are struggling to determine the value of green building construction because the market is still in its infancy; there is lack of comparable property data and other market information. The current real estate market poses difficulties for any new construction appraisal, and the nascent green building construction market is exceedingly more difficult for appraisers.
There are some resources available for appraisers, however, to be better equipped to appraise in this burgeoning market. The Appraisal Institute, membership association of professional real estate appraisers, offers seminars and a certification program that can help appraisers value green buildings, including its upcoming webinar: Residential Green Valuation: Tools for Valuing High Performance Properties. The proposed Green Resources for Energy Efficient Neighborhoods (GREEN) Act legislation will mandate that appraisers have all relevant information about residential property – including plans and specs, green energy labels, and certifications and Home Energy Rater Score (HERS) ratings.
It is clear that green building is only going to become more popular, especially once the real estate market turns around; although it may take some time, appraisers will need to understand all the new complexities in this field of appraisal and adapt.
By: Present Value
Additional Reading:
Understanding Depreciation for Machinery and Equipment
The term depreciation has different definitions depending on the audience you are speaking to. In accounting and finance, depreciation means the allocation of the cost of an asset over time. It is a way of allocating the purchase price of an asset across its useful life, which takes into account what is considered normal wear and tear over the life of an asset. For the appraisers of machinery and equipment, the term means something different. It is the estimated decrease in value from the initial purchase price of an asset based on a number of criteria, including physical, functional, and/or economic factors.
If an asset that is 20 years old is still functional, still being used, or if there is an active market for the asset, it still has value from an appraisal perspective. Although it may not have value from an accounting perspective, if the business owner were to sell the asset it would be worth more than zero, which is what it is valued at from an accounting perspective.
It can be confusing so it’s always best to speak to a professional at Present Value LLC if you have questions about the depreciation of your machinery and equipment or if you are looking to sell.
By: Present Value
Additional Reading:
New USPAP Changes Effective January 1, 2010
As we discussed in a post in June, The Appraisal Foundation, a congressionally authorized non-profit organization that fosters professionalism among appraisers by setting qualifications and standards, announced that its Appraisal Standards Board (ASB) adopted revisions for the 2010-2011 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP are the generally accepted performance and ethical standards for the appraisal profession in the United States. Standards are included for real estate, personal property, business, and mass appraisal. And, these changes go into effect on January 1, 2010.
The Appraisal Foundation has issued a question and answer document that is designed to help answer any questions that might arise. You can visit their website to learn more about all of the changes.
In particular, they have highlighted one revision to USPAP that will affect each assignment starting in 2010. Appraisers will be required to disclose to their client, prior to engagement and in the certification of appraisal reports, “any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity.”
As always, Present Value is USPAP compliant.
By: Present Value
Auction Value: Fair Market Value
We’re continuing our discussion of the three different types of value a certified appraiser will provide before a company auctions off its assets. Read the other posts on this topic here.
Fair market value (FMV) is the estimated potential value of equipment and machinery if it were sold in an open market. The following assumptions are made when determining FMV:
- Both the buyer and the seller are willing and knowledgeable about the asset, and neither party is being forced into the transaction.
- The market is open and accessible by many buyers and sellers.
- All rights and benefits attributable to the asset are included in the sale.
Additional factors are considered when assessing FMV: the cost or selling price of the item, sales of comparable assets, replacement costs, and expert opinions. FMV can be somewhat subjective because it is based on the circumstances of place and time, and the availability of sales data for comparable machinery or equipment.
This concludes our series of posts on the three types of asset values that a business should know prior to an auction. Understanding the three types of asset value that should be provided by an appraiser can help a business set appropriate price ranges at auction and receive the highest possible profit from auction sales.
By: Present Value
Auction Value: Forced Liquidation
In this post, we’re continuing our discussion of the three different types of value a certified appraiser will provide before a company auctions off its assets. Read the first two posts here and here. Today, we’ll tackle the topic of forced liquidation value.
Forced liquidation value assumes that a seller is being forced to sell his machinery, equipment, and other assets and wouldn’t be doing so if circumstances weren’t dire. Forced liquidation value is also known as auction value and implies a diminished sales value because of buyers taking advantage of a seller compelled to go to auction. The forced liquidation value of a company’s assets will always be lower than the fair market value.
An appraiser settles on an asset’s forced liquidation value by determining the fair market value and then judging the price for which the goods will most likely sell if there is not enough time to collect an adequate number of bids in an auction.
By: Present Value
Know the Value of Your Machinery and Equipment Before an Auction
While the economy is showing signs of improvement, there are still a number of companies that are being forced to close their doors, which in many cases includes liquidating their equipment and machinery assets. Oftentimes, the most quick, efficient way to do this is through auction.
When considering an auction, a company should first contact an appraiser in order to get a sense of the value of its equipment and/or machinery. In a previous post on equipment auctions, we discussed the role of appraisers in the auction process. In this and the next few posts, we will cover more detail about the three different types of value that a certified appraiser will provide prior to an auction – orderly liquidation value, forced liquidation value, and fair market value.
It is important to understand various ways that a business’ equipment will be valued in the marketplace in order to set appropriate price ranges at auction and receive the highest possible profit from the auction sales.
By: Present Value
Income Approach
This is the third installment of our series on the various methods used by real estate appraisers to determine property value. Last week, we discussed the sales comparison approach and the cost approach. This post will focus on the income approach.
The income approach generally is used to estimate the value of income-producing properties, including office buildings, hotels, warehouses, apartment buildings, and shopping centers. It is a method of appraising real estate based on the property’s anticipated future income.
The income approach, which is often viewed as the most reliable of the three approaches, is used when reliable financial data is available for recent sales of similar income properties in a given marketplace. The expected annual income of a property is divided by the capitalization rate to determine the market value of a property.
- The capitalization rate is calculated by a property’s net operating income and sales price for the sale of similar properties in a given area or marketplace. If sales of similar income properties in the area can be determined, one can establish a market capitalization rate by averaging the capitalization rate values of area sales.
- To determine the expected annual income of a property, an appraiser first estimates the annual potential gross income for a property, which includes how much rent each unit could generate in the market. The estimates of potential rental rates are generally derived from the current marketplace. The effective gross income for a property is generated by reducing the annual potential gross income by a vacancy allowance amount, which is determined by current market rental conditions for the type of property being analyzed. Additional income is added to the income estimates, including parking fees, laundry fees, and other profit-generating variables. Operating expenses are deducted from the effective gross income to determine the annual net operating income for the property.
It is important to note that when there is insufficient financial data for similar properties in a given market, appraisers may use all three appraisal approaches that we covered over the last three blog posts.
By: Present Value
The Cost Approach
Today is our second installment in our series about the different methods used by real estate appraisers to determine property value. On Tuesday, we discussed the sales comparison approach. Today, we’ll cover the cost approach.
To determine a property’s value using the cost approach, an appraiser would first estimate the value of the property if it were vacant. Then he or she would add that value to the current cost of building any structures that are on the property. The appraiser would then figure out the amount of depreciation on the structure and subtract that from the total. Depreciation on the land itself is rarely considered because unless there has been erosion, improper land use, or zoning changes, land typically does not depreciate.
The cost approach is usually used on newer structures, but tends to be less reliable for older buildings and properties. It is most commonly used for public buildings that serve a special purpose, such as a school or a church. The sales comparison approach, which we discussed earlier this week, doesn’t work for public buildings because it is difficult to find recently sold comparable properties. And the income approach, which we’ll discuss in a later post, doesn’t work for a public building appraisal because public buildings typically don’t earn income.
By: Present Value
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