“But I just want to know what it is worth…”
As an appraiser, I hear this comment often from potential clients. Unfortunately, there is not just one type of “value.” Value depends on the market that is reviewed to find the prices of other similar properties. Does the property sell in different markets? How do you know which market to look at?
The trained and experienced professional appraiser is knowledgeable about the various markets where a type of property is traded and which ones should be given consideration when valuing a property based on the use or need for the appraisal. For example, works by a particular artist may sell on EBay for less than $100, in the artist’s gallery for $1000, in the artist’s studio for $600, and at auction for $200. Which location is the one that is relevant for the appraisal assignment?
If the client needs insurance coverage, the appraiser looks at the gallery market or the studio where the property is most easily obtained to make the property owner “whole,” should replacement be necessary. This assignment results in the appraiser’s opinion of a Replacement Value.
If the client wants to sell the property, the appraiser instead would look at the internet, the auction market, galleries and maybe even contact the artist directly. There may be a secondary market for the artist. All of these options need to be considered. For a sale, the type of value concluded is the Market Value.
Below are some of the different types of value that appraisers seek in their appraisal assignments. The type of value concluded depends on what the “intended use” is for the appraisal.
It is necessary for anyone who needs an appraisal to clearly explain to the appraiser how they intend to use it.
Types of Value
- Replacement Value – Used primarily for insurance coverage
The highest price—in terms of cash or other precisely revealed terms—required to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in the relevant market. This includes the anticipated costs incurred in the replacement of property such as shipping, commissions to dealers or other commissionaires, and buyers’ premiums for auction purchases.
Source: ASA Personal Property Monographs. Citation: ASA Personal Property Committee, Monograph 2, 2010 - Replacement Value — Comparable (narrows Replacement Value to properties that require the Sales Comparison Approach to be used)
The price, in terms of cash or other precisely revealed terms, that would be required to replace a property with another of similar age, quality, origin, appearance, and condition within a reasonable length of time in an appropriate and relevant market.
Source: ASA Personal Property Monographs. Citation: ASA Personal Property Committee, Monograph 2, 2010 - Market Value – Used for purchase/sale of property
The most probable price a property should bring in within a competitive and open market and under all conditions requisite to a fair sale—the buyer and seller each acting prudently and knowledgeably as well as assuming the price is not affected by undue stimulus. Market value is similar to fair market value except that the provision for lack of compulsion to buy and sell is removed and the assumption of a sale within a specified time frame is added.
Source: 12 CFR §225.62(g) - Fair Market Value – Used for estates taxes, estate planning, charitable contributions, gifts
The fair market value is the price at which property would change hands between a willing buyer and a willing seller, when neither is forced to buy or sell, and when both have reasonable knowledge of all relevant facts - Fair Value – Used for mergers and acquisitions, sales and purchases of businesses, and financial reporting such as financial statements or balance sheets
Fair Value is the method of valuing business assets (and liabilities) for financial reporting (GAAP – Generally Accepted Accounting Principles). - Liquidation Value, Orderly – Used for estate sales, sale at auctions
The most probable price, in terms of cash or other precisely revealed terms, for which a property changes hands under forced or limited conditions in an orderly manner—generally advertised with reasonable time constraints, in an appropriate and relevant marketplace, and with knowledgeable buyers - Liquidation Value, Forced – Used for bankruptcy, quick sales
The most probable price, in terms of cash or other precisely revealed terms, for which a property will change hands if sold immediately. Forced liquidation does not allow time for finding the most advantageous market place. Nor does it allow general advertisement of the sale.
