The Difference Between an Appraisal and an Appraisal Review

When clients call our office asking for an equipment appraisal review, I've found it's important to ask them the purpose of the appraisal review. That quickly opens up the discussion about what an equipment appraisal review is and is not. And believe me, not everyone understands the difference between an appraisal (a quantitative analysis) and an appraisal review (a qualitative analysis). Some think they are going to get an opinion of value to compare to the equipment appraisal they've requested a review of or whether I think the equipment values in the report are "right." That, however, isn't what an appraisal review is really about.

What an appraisal review actually provides is a qualitative review of the report, according to the standard of care for appraisal practice as set forth in the Uniform Standards of Professional Appraisal Practice (USPAP). An appraisal report, whether an equipment appraisal or not, is expected to be an unbiased logical presentation of evidence that supports an opinion of value. For the report to fulfill its purpose, that logical presentation must be based on established standards and presented by a credible writer. This means that an appraisal review will determine how the appraisal report under review addresses the five qualities of credible appraisal reports, as specified in USPAP Standard 3:

Consistent with the reviewer's scope of work, the reviewer is required to develop an opinion as to the completeness, accuracy, adequacy, relevance, and reasonableness of the report, given law, regulations, or intended user requirements applicable to that work.

These qualities of completeness, accuracy, adequacy, relevance, and reasonableness provide the reviewer with a robust and standardized way of reviewing appraisals. An assessment of whether of not these qualities are present in the work under review illuminates the credibility of the appraisal work and, subsequently, the appraisal report being reviewed.

In upcoming posts, we'll talk a little bit more about how each quality plays into what an appraisal review might uncover about your appraisal report, but first, let's look at how & why the concept of appraisal review has developed and consider why an equipment appraisal might be a good idea for you and your clients.

The fact is that many appraisals do not meet the criteria of USPAP Standard 3. This has been an issue of great concern in the banking community since the late 1980's (S&L crisis). The need for appraisal reviews become such a paramount issue on the world economic stage in 2008 (Great Recession) that 2 years later, Dodd-Frank legislation required appraisal reviews for home loans.

The issue of appraisal review, however, isn't limited to real estate appraisals. Equipment appraisals are also under scrutiny, especially equipment appraisals for collateral lending. Ever since 2008, I've been getting get calls from bankers who have a bank regulator asking them some very hard to answer questions about equipment appraisal reports that are far from meeting the industry standard.

It's not just bankers and other lenders who benefit from appraisal review. One thing that puzzles me is why more attorneys don't seem to understand the value of a true appraisal review - or what an equipment appraisal review can do for them or their clients. In many situations, a review of the equipment appraisal before the report is taken to court could eliminate a lot of confusion, time and money. Appraisal reviews make a lot of sense for the legal profession.

Attorneys do call our equipment appraisal office with requests for an appraisal review, but it generally turns out that they are more more concerned with knowing if I agree or disagree with the equipment value proffered in the report than with whether the equipment appraisal in hand meets the criteria for a qualified and defensible report. The value may or may not be "right," but that's not the real question for an equipment appraisal review. After all, even a broken clock is right 2 times a day!

The primary question regarding an equipment appraisal report - or an appraisal of any sort - isn't "Is the equipment value number right?" but "Is the number reliable?" An unqualified appraiser, or an appraiser using flawed methodology, might get lucky and stumble on the "right" number but luck isn't verifiable or or duplicatable and is certainly not something most attorneys would want to build a legal case on. An appraisal review will determine whether or not the opinion of value is credible and thus defensible.

Bottom line: Don't take for granted that the equipment appraisal you're basing a loan, a legal case, or a business deal on is worth the paper it's printed on. If you're counting on that value, consider an appraisal review.