(by David Maloney) A determination of the loss-of-value (also referred to as diminution of value) of damaged personal property is frequently required in order to arrive at a fair and timely settlement of a transit-related or casualty loss damage claim. Yet there is no task more onerous to the appraiser than attempting to assign a loss-of-value to an item of personal property which, having suffered damage, has been professionally repaired. Damage could be transit-related such as might occur during a household goods shipment, or damage could be caused by flood, fire, earthquake breakage, in-home accident, vehicular accident or some similar casualty. In any of these scenarios, the appraiser might be asked to offer an opinion of loss-of-value.
Loss-of-value is an opinion of the amount of value that an item of personal property has lost due to it having been damaged and taking into consideration the quality of subsequent repairs or replacements. (A “replacement” is simply a substitution, e.g., original drawer pulls might require replacement with new pulls if one of the originals is broken and cannot be repaired; or an old marble dresser top might require replacement with new marble if the original was broken during a move.)
Loss-of-value reflects the reduced level of marketplace acceptability of the damaged albeit repaired item. It can be thought of as the amount a seller would have to discount the asking price of a professionally-repaired item in order to induce a sale to a knowledgeable buyer. Mathematically, loss-of-value equals the difference in market value prior to damage and the market value after the damage has been repaired.
Note that an accurate loss-of-value determination cannot be made until repairs have been completed. Obviously, a damaged table with a broken leg has suffered some decrease in worth by the mere fact that it can no longer serve its intended purpose. Any remaining value while still in damaged condition is referred to as salvage value.
The appraiser can offer an opinion of salvage value while the property remains in damaged condition, but can loss-of-value be determined while the property remains in damaged condition? By making use of the hypothetical condition that repairs had been completed and by making extraordinary assumptions about the quality of those hypothetical repairs, it is possible to provide an opinion of loss-of-value in advance of repairs actually being made. But to form the most accurate opinion of if and to what extent loss-of-value has occurred, one must wait until after the repairs have actually been completed in order to accurately gauge the quality of the repairs and the final condition of the item.
Loss-of-value is subjective and difficult to determine. Whereas replacement cost can be based on well-documented asking prices, and market value can be based on well-documented past sales of comparable items, loss-of-value cannot be determined so precisely. To be able to do so, one would have to find a duplicate comparable item which was in the same pre-damage condition, which suffered the same type of damage, which underwent the same degree and quality of repair, and which subsequently had a post-repair appearance identical to the repaired item in question. This possibility simply does not exist in real life, nor are there any formulas or percentages which can be applied to determine loss-of-value.
In order to determine loss-of-value, each item must be considered individually in light of the following criteria. Once a loss-of-value has been deemed to have occurred, an estimate of the amount of loss-of-value must be made. The following three criteria must be met before a loss-of-value can even be deemed to have occurred.
- Criteria 1: With few exceptions such as automobiles, in order to even be considered for loss-of-value, the repaired item must be of the type which appreciates in value such as do most antiques and collectibles.
Depreciable property (such as sofas, coffee tables, televisions and most other common household items) will not normally suffer any loss-of-value if a competent repair is affected. For instance, a discount furniture store dining table (of which there is no great scarcity) is considered to be depreciable property. If its top is gouged, it will not suffer any loss-of-value if the damage is professionally repaired. An appearance allowance or a goodwill allowance might be in order to placate the owner, but no loss-of-value occurs because the repair has restored the item’s level of marketplace desirability to its original level. In other words, the marketplace’s expectation of an acceptable level of like-new (or pre-damage) condition has been restored; consequently, no loss-of-value has occurred.
- An appearance allowance is a type of cash settlement offered when the transit-related damage is not very severe and does not detract from the utility of the object or significantly from its appearance. Usually, repair attempts would not be successful or would be impractical or uneconomical. The owner keeps the item but is compensated with an appearance allowance for the damage incurred. An appearance allowance can also be offered when the repair is less than perfect.
- Goodwill allowance is a term used in the claims industry to describe a cash payment made to the owner which compensates for what the industry considers to be only a perceived loss, damage or inconvenience, but which the owner feels to be a real loss, damage or inconvenience. To placate the owner, the insurance company (or moving company) could authorize an allowance to be paid as a gesture of goodwill simply to settle the claim while at the same time admitting to no liability.
An exception to this criteria is automobiles and other titled motor vehicles. Because of the stigma associated with a vehicle that has been in a wreck (and with services such as CARFAX vehicle histories, these records are well-documented and easily obtained), almost every vehicle that has been involved in an accident and subsequently repaired suffers some level of inherent diminished value despite being categorized as depreciable property. By the way, it’s been estimated that 55% of consumers would not buy a car that had been in an accident, and 81% would not have a car that had been in a wreck unless they were given a large discount.
Appreciable property. While a depreciable item will not usually suffer a loss-of-value, most items of appreciable personal property very well might. An early 19th century American Federal mahogany sideboard (classified as appreciating property) having a badly gouged top would suffer loss-of-value despite an excellent repair. This is because in the upper stratosphere of high-valued and rare antiques, any deviations from “original condition” could have a severe impact on desirability among collectors and, consequently, would have a depressing effect on value.
- Criteria 2: For there to be a loss-of-value the damage and its associated repair must be of the type which is unacceptable to the collector and which, therefore, affects the item’s desirability. Many antique toys or pieces of antique ceramics and glass survive in virtually untouched condition; therefore, collectors expect such pieces to be pristine. Any variation caused by damage (despite the quality of repair) diminishes value substantially. An antique Rookwood vase that was broken and repaired will sustain a major loss-of-value.
On the other hand, because of its hard use, pristine pieces of antique furniture are indeed rare; consequently, old repairs to such pieces are commonplace. For the collector, minor new repairs expertly made usually cause little or no loss-of-value. Major repairs, though, could cause a significant loss-of-value. A repaired scratch on a 1915 round oak dining table would cause minimal, if any, loss-of-value; however, a broken and repaired leg of an early 19th century American Federal game table would cause a significant loss-of-value because while collectors may tolerate repairs to an early 20th century table, they are typically less accepting of repairs to an early 19th century table.
- Criteria 3: For the newly repaired damage to affect value, the item must not have pre-existing damage or old repairs of the sort which would reduce or eliminate the adverse impact of subsequent and similar sorts of new damage. For instance, one additional chip to the rim of an American brilliant-period (1880-1910) cut glass punch bowl which already had several pre-existing chips would not cause any measurable loss-of-value. Similarly, an antique chair with several surface scratches will not suffer a loss-of-value due to the addition of yet one more scratch that has been repaired. (Once again, while an appearance allowance or a goodwill allowance may be in order to pacify the owner, no loss-of-value can be shown to exist because collector desirability remains unchanged.)
Assuming the above three criteria have been met, two additional factors must be understood and taken into consideration in order to judge the relative degree of loss of value — the significance of the damage and the quality of the repair:
- The significance of the damage. While some damage might be considered major, much is not. Damages not considered major will have less of an impact on value than damages that are considered minor. Again, we must keep in mind the age and desirability of the piece in question as well as consumer preferences regarding what is and is not acceptable.
- A repaired surface scratch or rub mark on a piece of antique furniture is normally not considered to be a major drawback and may cause loss-of-value.
- Small sections of lost and replaced veneer, broken and repaired feet, or a properly restored gouge do have a small but noticeable impact on value.
- Major repairs such as the complete replacement of a dresser drawer, or the replacement of a missing hand on a Meissen porcelain figurine, or the complete stripping of the finish of a tall case clock causing the loss of original surface patina (typically very desirable to the collector) will cause significant loss-of-value.
- The quality of the repair. Invisible repairs using appropriate restoration techniques are vital to preserving the integrity and value of a damaged piece. Any deviation from this level of professionalism will impact adversely on the item’s final value. In other words, loss-of-value will be inversely proportional to the quality of the repair.
So, given all this, how does one arrive at a final opinion of loss-of-value? There are no formulas for calculating loss-of-value. Nor are there any meaningful comparable market data that can be used as a direct basis for an opinion of loss-of-value. Instead, the appraiser must use his or her best judgment to develop an opinion of loss-of-value based on an understanding of the marketplace and how appreciable and depreciable properties are replaced, how dealers discount to encourage a sale, and what types of damages and repairs are and are not an acceptable to the consumer.
© David J. Maloney, Jr. 2012 (Excerpted from Appraising Pesonal Property: Principles & Methodology – 5th edition)