Archive for the ‘Appraisal Terms’ Category
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
The Sales Comparison Approach
In real estate appraisal, there are three methods used to determine the value of a property: sales comparison approach, cost approach, and income approach. This blog will cover the sales comparison approach.
The sales comparison approach is based on the principle of substitution, meaning a prospective buyer would not pay more for a property than he or she would pay to purchase a comparable property. The approach stems from the acknowledgement that a buyer will compare the prices of various suitable properties and purchase the one with the lowest cost. Within the sales comparison approach, a state-licensed real estate appraiser will gauge and study the actions of buyers, sellers, and investors in the marketplace.
The appraiser will collect information on recent sales of properties similar to the property being valued. These compilations of data are called “comparables.” Sources of comparable data include real estate publications, public records, buyers, sellers, real estate agents, real estate appraisers, and others. Details of each comparable sale are in the appraisal report. Since comparable sales are not identical to the subject property, adjustments are sometimes made for date of sale, location, style, number of bathrooms, square feet, etc. The idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the adjustment to the comparable is higher or lower than the subject property’s value, an adjustment is made higher or lower, as appropriate, to the subject property’s value. From the analysis of the adjusted prices of the comparables, the real estate appraiser determines the subject property’s value.
By: Present Value
Types of Appraisal Value
When it comes to determining the value of a property, there are a number of types of value that a real estate appraisal can determine. The most common types are listed below.
- Market value is the price at which an asset would trade in a competitive auction setting. Market value is usually synonymous with open market value or fair value.
- Value-in-use is the net present value (NPV) of a cash flow that an asset generates for an owner under a specific use. Value-in-use is usually below the market value of a property.
- Investment value is the value to one particular investor, and is usually higher than the market value of a property.
- Insurable value is the value of real property as indicated by an insurance policy. Generally it does not include the site value.
- Liquidation value may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is compelled to sell after a period of time that is less than the normal market time frame.
By: Present Value
Appraisal Organizations Address Letter to the FHA
A number of appraisal organizations, including the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers, released a memo to the Federal Housing Administration (FHA) regarding the Home Valuation Code of Conduct (HVCC) and FHA’s possible adoption of elements of the HVCC.
The letter calls the FHA to enhance appraiser independence and to more closely monitor mortgage brokers and appraisal management companies. Below are the specific, overarching recommendations made in the letter:
- Recommendation 1: Establish the conditions for mortgage broker participation in the FHA appraisal ordering process.
- Recommendation 2: Supplement state and federal appraiser independence requirements with more robust appraiser independence requirements specific to FHA.
- Recommendation 3: Rescind Mortgagee Letter 97-46.
- Recommendation 4: Develop rules and expectations relating to appraisal management companies.
To view the full letter to the FHA, visit the Appraisal Institute website, here.
To view Present Value’s previous blog posts on HVCC changes and industry reactions, click here, here, and here.
By: Present Value
Valuing Intellectual Property: Income/Relief-From-Royalty Approach
This is the last in the series on Valuing Intellectual Property. This post will cover the Income/Relief-From-Royalty Approach. Click on the following to read the first in the series: Valuing Intellectual Property. And, click on the following to read the other two Valuing Intellectual Property break-out posts on Cost Approach and Market Approach.
The income method to valuing intellectual property (IP) assets is based on the income-producing capability of the IP. It is determined by the anticipated income that can be derived over the life of the piece of a business that is tied to the subject IP assets.
Through this methodology, factors used to determine the value of IP assets over their lifetime include size and factors influencing the potential and future market factors, risk factors, competitive landscape, and customer attractiveness.
The relief-from-royalty method is considered to be a subset of the income method. Through this approach the value of the IP asset is equal to the value of the after-tax royalties that the owner is “relieved” from paying by virtue of owning the assets. A royalty rate is used to establish the potential cash flow that can be associated with the IP. The royalty rate is determined by what a licensee would be willing to pay for use of the IP and based on a percentage of revenues.
Oftentimes, the “25-percent rule” will be used in such a case, which assumes a royalty equal to 25% of the operating profits of the business for which the licensed IP is used. The income stream calculated using the royalty becomes representative of the economic benefit attributable to the IP. A capitalization of that income stream becomes an indication of value. However, this may only represent a fraction of the economic benefit attributable to the IP assets.
As we mentioned in the first post in this series, there is overlap among all the approaches used to value intellectual property, and an appraiser should look at all of these methodologies before determining the value of IP assets.
By: Present Value
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