An appraisal review is a good choice whenever you feel uneasy about the qualifications of the equipment appraiser or confused about the methodology used in an equipment appraisal report. This could be a report you originally contracted for - or it could be an equipment appraisal report you've received from another party.
In situations such as legal cases, collateral loans, business deals, insurance settlements or marital dissolution, for example, one party often presents an equipment appraisal as a fait accompli. That appraisal may be appropriate and reliable, but if you're uncertain, consider requesting an equipment appraisal review. A qualitative review of a fait accompli report can provide you with useful information when you are faced with making important decisions based on an appraisal report that you didn't initiate and don't fully understand or trust.
One recent client of mine - who would certainly have benefited from an earlier equipment appraisal review - had taken out an SBA loan to purchase a manufacturing business. The equipment appraisal for the acquisition had been initiated by the bank offering the loan and indicated that the equipment had a liquidation value greater than the purchase price of the business. He took the loan under the assumption that, should the enterprise not pan out, the sale of the equipment would cover the loan. Within a year of the acquisition, the main client had left and the enterprise was insolvent. When the buyer started preparing for liquidation he was shocked to discover that the liquidation values in the report were inflated by about 50%. He called NorCalValuation for an equipment appraisal review and what we uncovered was that the original equipment appraisal failed the first basic rule of appraisal reports: the appraiser did not have the qualifications needed to do the work. Not only did this create a financial problem for my client, but it also created a problem for the financial institution that used an unqualified equipment appraiser to provide the basis for an SBA loan ...
Failure to comply with any of these 3 basic rules pretty much undermines the validity and defensibility of an equipment appraisal report. I'll discuss each of these rules in more detail in upcoming posts, but for now, let's focus on what an appraisal review might uncover about your appraisal report, beginning with that first, very important rule of appraiser qualifications.
Does the appraiser have the experience, skill, knowledge and training to perform the appraisal? The Uniform Standards of Appraisal Practice (USPAP) requires that an appraiser demonstrate competence in the work at hand. This is one reason that organizations like the American Society of Appraisers exist. The ASA trains and educates its members in a variety of disciplines, including Machinery and Equipment -- more formally known as Machinery and Technical Specialities (MTS) -- as well as niche areas in each of the disciplines, such as aircraft appraisal in MTS. Appraisers designated as Accredited Senior Appraiser (ASA) with the American Society of Appraisers have, by earning that designation, demonstrated competence in their specified discipline. But on more than one occasion, in reviewing appraisal reports, I've discovered that appraisers claiming the ASA designation had absolutely no accreditation whatsoever. This is easy for an appraisal client to investigate but not something most folks think about, unfortunately for the attorney, business owner or banker who has depended on the validity of an appraisal report by an incompetent appraiser.
Does the appraisal comply with industry standards? USPAP is the accepted standard for the appraisal industry in the USA and Cananda. Almost every appraisal report you will ever see will declare that it is "USPAP compliant." Unfortunately, saying it doesn't make it so. All too often when I review the CV that must, according to USPAP, be attached to such an appraisal report, it appears that the author has never actually taken a USPAP course, let alone the required 2-year update. Appraisal reports that are not USPAP compliant will not stand up in court -- or anywhere else.
Does the appraisal make logical sense? Among many other things, USPAP requires that an appraisal be professionally researched and that the appraiser maintains a work paper file to support the values listed in the report. Please note that some lapses in research, logic, or methodology might only be noticed by a qualified appraiser! For example, I once reviewed an appraisal that used the income approach to value an obsolete piece of equipment; a more casual reader might not have realized how inappropriate this appraisal approach was for this particular piece of equipment. USPAP also requires that an appraisal report have an analytical and logical flow to it. What this means is that you, the intended user of the report, should be able to understand the report as a whole, including what the appraiser did and how it led to the opinion of value. If the report doesn't make sense to you, you can bet it will not make sense to anyone else either -- including a banker, judge, jury, or the IRS. This is a clear indication that you need an appraisal review ... and perhaps a new appraisal.
As you can see, an appraisal report can have a variety of flaws, each of which can cast grave doubt on the dependability of the opinion of value declared in that equipment appraisal report. If you have any questions or doubts - especially if you feel uneasy about the qualifications of the equipment appraiser or confused about the methodology used in an equipment appraisal report - consider an equipment appraisal review. It's better to take precautions in advance rather than make important decisions based on a sketchy appraisal report, even if it is presented as a fait accompli.
Jack Young, ASA, CPA is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers specializing in Machinery and Equipment Appraisals and a Certified Public Accountant (CPA). Mr. Young has also been awarded a Master Personal Property Appraiser (MPPA) designation from the National Auctioneers Association. He has thousands of hours experience as an Equipment Appraiser and is an active member of the Northern California Chapter of the ASA, where he serves as Chapter President.
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