Category: Appraisal Practice/USPAP

Loss-of-Value

Posted on by Dave Maloney

Loss-of-Value

(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.

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Fair Market Value

Posted on by Dave Maloney

Fair Market Value

(This is the 3rd of a 3-part article | Part 1 | Part 2)

(by David Maloney) Fair market value is often confused with market value. The stumbling block is normally in regards to the issue of title transfer. While a market value appraisal assumes the transfer of sold property to the new owner as of a specified date, fair market value assumes that the item is not sold, but rather that ownership is retained. Fair market value is used, as an example, by the IRS to substantiate tax deductions for noncash charitable contributions, or as a basis on which to levy estate taxes on property in the decedent’s estate that is bequeathed and not sold.

Fair market value is defined by a legal or regulatory jurisdiction and may vary with individual jurisdictions, i.e., from state to state. For the purposes of this book, we will make use of fair market value as defined by IRS Regulation §1.170A-1(c)(2) and as expanded on by the Treasury Regulation state §20.2031-1(b).

Definition of Fair Market Value

Treasury Regulation §1.170A-1(c)(2) defines FMV for noncash charitable contribution purposes as:

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Market Value

Posted on by Dave Maloney

Market Value

(This is the 2nd of a 3-part article | Part 1 | Part 3)

(by David Maloney) Market value is an all-encompassing general concept that is based on a market perspective (as opposed to a user’s perspective) and on what marketplace participants view as typical and normal market conditions.

The public’s expectation that a market value appraisal reflects only the perspective of the marketplace, and is not affected by such other criteria as an intended user’s objectives, is important. Meeting this expectation serves to foster and promote public trust in professional appraisal practice, a fundamental purpose of the Uniform Standards of Professional Appraisal Practice and one that applies to all work performed under USPAP. (USPAP AO-22)

Why is market value such an important type of value? Because it refers to a price that a seller can expect to receive from a buyer in an open and fair transaction. Knowing the market value of a property allows a would-be seller to determine an asking price. Without knowing the market value, the seller might price their property too high or too low, either of which could have negative financial results (possibly on the seller as well as on the buyer).

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Market Value vs. Fair Market Value: What’s the Difference?

Posted on by Dave Maloney

Market Value vs. Fair Market Value: What’s the Difference? 

(This is the 1st of a 3-part article | Part 2 | Part 3)

(by David Maloney) There seems to always have been confusion regarding the term “market value” and how it relates to “fair market value.” Given the inconsistent manner in which terms are used within the appraisal profession, it is not surprising that such confusion exists. There is “market value” itself, but there are also various “types” of market value such as “fair market value” and “orderly liquidation value.” But there are also types of value that are NOT market value types such as “replacement value” and “forced liquidation value.” 

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Proposed Qualification Criteria for Appraisers

Posted on by Dave Maloney

Will TAF’s Proposed Criteria for Personal Property Appraisers Have Teeth?

(By Dave Maloney Sep 1, 2012) The Appraiser Qualifications Board (AQB) of The Appraisal Foundation (TAF) recently released a proposed new version (click here to view) of its Qualifications Criteria for Personal Property Appraisers. A colleague recently posited that: “Even though the proposed standards are voluntary, those of us belonging to an association will be impacted by the acceptance of the standards by the association.”

My reply was that I felt that the issue is more complicated than that.

I was a member of the TAFAC “criteria” committee back in 1998 when we first adopted the minimum qualification criteria for the personal property appraiser. As of this writing (September, 2012) those current criteria (click here to view) are in force and will remain so until the new criteria are adopted which might be in two or more years.

Those 1998 criteria are clearly voluntary for all appraisers, regardless of their societal affiliation. They criteria states so, to wit: “The AQB envisions that the [1998] Personal Property Appraiser Minimum Qualification Criteria will be used by major clients of personal property appraisers such as corporations and government agencies. It is important to note that this document sets out minimum criteria with which personal property appraisers may voluntarily wish to comply. The AQB does not foresee any governmental body utilizing these guidelines as part of a regulatory program.”

A few years ago I queried all societies and was surprised to learn that no society at all had or now has an established system for maintaining a registry of their members who meet the 1998 criteria. What is more, the 1998 criteria requires a comprehensive exam. Again, no society offers a comprehensive exam required for members wishing to voluntarily qualify. In short, to my knowledge, no society has systems in place to facilitate their members complying with the existing (1998) criteria. It would seem that the 1998 criteria has failed completely in its stated goal as noted above.

But the optional compliance requirement, for some, is now going to change. The criteria now being proposed are no longer voluntary for all appraisers.

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Misuse of Terms “USPAP Certified Appraiser” and “USPAP Certified Appraisals” Threatens Public Trust

Posted on by Dave Maloney

Misuse of Terms “USPAP Certified Appraiser” and “USPAP Certified Appraisals” Threatens Public Trust

(by David Maloney) There appears to be a growing use by appraisers of two USPAP-related terms which might be construed as being misleading, thus this caution.

In the first instance, an appraiser refers to him or herself as being a “USPAP Certified Appraiser.” In the second case, the appraiser states that he or she offers “USPAP Certified Appraisals.”

According to John Brenan, Director of Research and Technical Issues at The Appraisal Foundation, “The Appraisal Foundation does not certify appraisals or appraisers.” This alone should give one pause for using the two questionable terms, but there are additional reasons as well.

The Ethics Rule of USPAP prohibits advertising in a “false, misleading or exaggerated manner.” Doing so, of course, endangers public trust in the appraisal profession — and recall that maintaining the public’s trust is the primary reason for the development of USPAP in the first place. In addition, during deposition or testimony the opposing attorney might take an appraiser to task for promoting him or herself as being a “USPAP Certified appraiser” or offering “USPAP Certified appraisals” when The Appraisal Foundation itself has stated that no such type of appraisers or appraisals exist.

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Electronic Report and Workfile Storage

Posted on by Dave Maloney

USPAP’s FAQs Adress Electronic Report and Workfile Storage

In the 2012-2013 edition of USPAP, two Frequently Asked Questions (#92 and #93) address issues relating to electronic storage.
 
FAQ #92. Electronic workfile storage 
 
Question: Recently I have considered maintaining only electronic workfiles (i.e., saving only electronic versions of my reports and supporting data, and scanning any paper documents used so that copies may be stored on electronic media). Is this prohibited by USPAP?
 
Response: No. There is nothing in USPAP that would prohibit an appraiser from maintaining only electronic versions of workfiles.

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The Appraiser-Client Relationship and Confidentiality

Posted on by Dave Maloney

The Appraiser-Client Relationship and Confidentiality

(by David Maloney) There exists a special relationship  between the  appraiser and the client, and the appraiser is obligated to protect the confidential nature of that relationship. Specifically, the appraiser must  reveal neither the 1) results of an assignment nor 2) any confidential information other  than as permitted by the ETHICS RULE.

According to the  ETHICS RULE, confidential factual data obtained from the client and the results of an appraisal may be disclosed only to:

  • The client and anyone specifically authorized by the client, e.g., an insurance company, or, in the case of a divorce, to the client’s attorney,
  • Third parties authorized by due process of law, e.g., pretrial discovery, depositions, court testimony by the appraiser, or
  • A duly authorized appraisal society’s peer review committee

As noted, an appraiser must  respect the confidential nature of information obtained during the appraisal  process. USPAP defines confidential information as:

information that is either: identified by the client as confidential when  providing it to an appraiser and that is not available from any other source;  or classified as confidential or private by applicable law or regulation. (USPAP)

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Is an Appraiser a Fiduciary?

Posted on by Dave Maloney

Is an Appraiser a Fiduciary? 

(by David Maloney) If deemed to be a fiduciary, appraisers could be held liable for breaching their fiduciary duties. But do appraisers normally perform in the role of a fiduciary? The answer is “No.” 

 Though professionals, appraisers typically act in an arm’s-length manner in the capacity of independent contractors but not as fiduciaries. 

A fiduciary is one who has a special relation of trust, confidence, or responsibility in his or her obligations to others, as does a bank trust officer, a guardian and his minor ward, the Executor of an estate, a company director, a lawyer and his client, or an agent of a principal (e.g., an estate liquidator or an auctioneer.) A fiduciary is expected to act as an advocate for his or her client who is normally in no position to supervise or control the actions taken by the fiduciary on his behalf. The client must take those actions on trust, and the fiduciary principle is designed to prevent that trust from being misplaced. Fiduciaries who violate that trust can be held liable for doing so. 

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Definitions of “Qualified Appraiser” and “Qualified Appraisal” Continue to Evolve

Posted on by Dave Maloney

Definitions of “Qualified Appraiser” and “Qualified Appraisal” Continue to Evolve

(by David Maloney Sept. 30, 2011) A taxpayer is generally permitted a deduction for noncash charitable contributions subject to certain limitations depending on the type of taxpayer, the nature of the property contributed, and the type of donee organization. When the deduction is permitted, taxpayers are required to obtain a qualified appraisal from a qualified appraiser for donated property for which a deduction of more than $5,000 is claimed.

Since tax deductions reduce the amount of tax collected by the federal government, Congress has tightened the rules governing appraisals in recent years in quest of discouraging valuation abuse, i.e., overstating the value of the contributed property. To accomplish this, relevant statutes were introduced embedded within the American Jobs Creation Act of 2004 (Jobs Act) and the Pension Protection Act of 2006 (PPA).

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