Chapter 1: Appraisal Terminology. While USPAP does not define the term competency, it does contain a COMPETENCY RULE.

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1 Chapter 1: Appraisal Terminology Competency While USPAP does not define the term competency, it does contain a COMPETENCY RULE. The COMPETENCY RULE states that in all cases, the appraiser must perform competently when completing the assignment. In addition, competency requires the appraiser to have: The ability to identify the assignment problem (See the Chapter 7 section entitled The Appraisal Process and USPAP for a discussion of problem identification.), The knowledge and experience to complete the assignment competently, The knowledge of and be compliant with laws or regulations that apply to the appraiser or to the assignment. In addition to the above, the Comment section to the COMPETENCY RULE notes that competency also applies to such factors as: o An appraiser's familiarity with the type of property being appraised, o With a particular marketplace (such as familiarity with the wholesale market if that is the market being researched), o With market activity in the relevant geographic area (which might be different from that in your locale), and o With a particular intended use (such as being familiar with IRS regulations if doing an appraisal for the intended use of noncash charitable contribution of a valuable work of art.) In addition, the COMPETENCY RULE states that if (prior to accepting an assignment or while performing the assignment) the appraiser determines that he or she is not competent, certain steps must be taken in order to complete the assignment competently, and those steps must be disclosed in the appraisal report. The appraiser can remediate a lack of competency by additional personal study, or by association with another appraiser who is reasonably believed to have the necessary knowledge or experience, or by retaining the services of others who possess the required knowledge or experience. Generalist personal property appraisers commonly associate with other appraisers or with subject matter experts in order to assist in any number of ways including to properly identify the subject property, to conduct market research, to develop an opinion of value, etc. The COMPETENCY RULE also requires that the appraiser not accept the assignment (or requires the withdrawal from an assignment if the assignment has already accepted) if a deficiency in competency is recognized and if competency cannot be acquired prior to completion of the assignment. Note that it is only after identifying the appraisal problem and determining the scope of work required to achieve credible assignment results that an appraiser will be in a position to determine

2 Chapter 1: Appraisal Terminology whether or not he or she is capable of completing the assignment competently. In other words, the appraiser should not even accept the assignment without first identifying the assignment problem and determining the scope of work. If the appraiser deems he or she is not sufficiently competent, the COMPETENCY RULE dictates steps the appraiser must take. Note that USPAP does not require that every report contain a statement attesting to the appraiser s competency. It is only when an appraiser accepts an assignment while having a lack of knowledge or experience (or discovers same during the course of an assignment) that the COMPETENCY RULE requires the appraiser to disclose the deficiency in the report as well as the steps that were taken in order to complete the assignment competently. ( USPAP FAQ #102) Supplemental reading: USPAP COMPETENCY RULE Online Appraisals An online appraisal is an electronically-transmitted personal property appraisal done via the Internet in which value conclusions are based on non-verifiable, client-provided information such as photographs and written descriptions. The use of online appraisals are valid in situations in which the use of photographs have traditionally been considered a typical appraisal practice such as in the case of theft or property loss by fire or flood. Issues relating to the applicability of online appraisals, their development and preparation, and the online reporting of the appraisal conclusions are similar to those issues that have been traditionally applied to pre-internet appraisals done without the benefit of personal inspection. (See the Chapter 3 section entitled Inspection vs. Non-Inspection and the two Chapter 5 sections entitled Online Appraisals and Using Photographs to Appraise When a Hands-On Inspection is Not Possible for related discussions.) Personal Property Personal property appraisers provide appraisal practice services to value personal property as opposed to real property. There are two categories of personal property: that belonging to individuals and that belonging to businesses Personal property can be considered to be any and all tangible property that is not classified as real property. (Real property relates to the interests, benefits, and rights inherent in the ownership of real estate. Real estate is defined as land and any improvements attached to the land either by nature (e.g., woodlands, crops, minerals, water) or by people (e.g., a house, silo or factory.) USPAP defines Personal Property as: PERSONAL PROPERTY: identifiable tangible objects that are considered by the general public as being personal - for example, furnishings, artwork, antiques, gems and

3 Chapter 1: Appraisal Terminology jewelry, collectibles, machinery and equipment; all tangible property that is not classified as real estate. (USPAP) At times, though, it becomes difficult to tell if an item of property is personal or real property such as might be the case with storage racks, chandeliers, telephone systems, and plant machinery. A key characteristic of personal property is the ability to move it without damage either to itself or to the real estate to which it is attached. An item ceases being personal property and becomes part of the real estate only if it is affixed in such a way that it loses its original physical character and cannot practically be restored to its original condition. Such an item is referred to as a fixture. A fixture, then, is an item that was once personal property but becomes part of the real estate. When a hot water heater is delivered to a construction site and is awaiting installation, it is personal property. But once installed, it becomes a fixture and is considered part of the real estate. Other examples include light fixtures, a dishwasher, and a gas furnace. In deciding whether or not personal property has become a fixture, there are generally the following three tests: That the item is attached to the real property The intent of the parties Tradition and the type of property involved A builder removes a ceiling fan from the box, installs it on the ceiling, and sells it along with the house. This item has satisfied all three tests for becoming a fixture. But what about curtains and other window treatments? In many cases, a purchaser of a home has been disappointed to find out the curtains he or she assumed would convey with the house have been removed once the premises become vacated. The purchase contract should specify the intent of the buyer and seller, i.e., what they are considering as a fixture (not to be removed) or personal property (expected to be removed). Although furniture is generally considered as personal property, motels, restaurants and hotels are traditionally sold with room furnishings included. In this instance, furniture is considered a fixture and, therefore, part of the real property. Similarly, in some parts of the country, homes are traditionally sold with major appliances such as the clothes washer and dryer left installed. They too, then, are considered fixtures and to be part of the real estate. When confronted with uncertainties as to the treatment of property, the appraiser should address the problem, consult the client, and come to an agreement as to how to treat the property. Personal property can be an undivided unit unto itself such as a 2 carat diamond, or personal property can be made up of component parts each of which could be the subject of a fractional appraisal. An example of the latter would be a pearl necklace made up of many individual pearls. In both examples, the component parts of the property (diamond, mounting, individual pearls) have their own distinct values as do the whole properties themselves (i.e., the ring and the necklace).

4 Chapter 1: Appraisal Terminology Intangible Property Intangible property is any non-physical asset. USPAP defines Intangible Property as: INTANGIBLE PROPERTY (INTANGIBLE ASSETS): nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment. (USPAP) The appraisal of intangible property is typically the purview of the business valuator and not the personal property appraiser; therefore, the appraisal of intangible property will not be covered in this book. Appreciable vs. Depreciable Personal Property Appreciable personal property is property which normally increases in value over time. Examples include items once owned by famous personages as well as most antiques, collectibles, fine art, etc. While on occasion some appreciable property might go down in value, the trend is normally upwards. Depreciable personal property is property that decreases in value over time. Examples typically include everyday clothing, household furniture, kitchen appliances, etc. A primary distinction between the two types of property is that while depreciable property can be suitably replaced with a brand new property (such as a two-year old sofa), because of its antiquity, collectability, provenance, etc., appreciable property cannot. In the insurance industry, for depreciable types of property depreciation tables are used to calculate Actual Cash Value as a means of determining a fair settlement in some loss cases. (Actual Cash Value is calculated by subtracting an amount for depreciation from the current cost to replace the item with a brand new item.) Note, though, that for appreciable property depreciation formulas cannot be applied. Original Tiffany lamps are considered appreciable property (historically each year they have typically increased in value). Should such a Tiffany lamp be destroyed in a house fire, hopefully the owner had an agreed value policy (not an ACV policy) to ensure that he or she is compensated based on what it would cost to buy another original Tiffany lamp and not on what the depreciated value would be based on the lamp being 100 years old (in which case the owner would get nearly nothing!) On the other hand, the value of new lamps for the purpose of settling an insurance claim (e.g., for an actual cash value policy) can be calculated based on age-life formulas because new lamps are depreciable property which have a defined life expectancy and they do, indeed, go down in value over time. (See the Chapter 2 section entitled Actual Cash Value (ACV) for a further discussion of calculating actual cash value.) It is often argued that all personal property can be divided into one of these two categories appreciable personal property or depreciable personal property. The distinction is an important one, especially when addressing issues of:

5 Chapter 1: Appraisal Terminology Actual cash value. As mentioned, determining actual cash value by calculating replacement cost (new) less depreciation is an inappropriate technique to use for property which does not depreciate such as an antique clock, but which, instead, appreciates in value over time. Loss-of-value. While an item of appreciable property might suffer substantial loss-ofvalue if damaged and subsequently repaired, an item of depreciable property typically would not suffer loss-of-value if professionally repaired. Methods of acquiring a replacement property. An item of depreciable property can often be replaced with a brand new, suitable replacement by means of purchase or the construction of a suitable new replacement property. An example would the purchase of a new replacement sofa or the purchase of a new custom-made entertainment center. On the other hand, an item of appreciable property can normally be replaced only by the purchase of a suitable comparable replacement property (i.e., one of having similar value-relevant characteristics such as age, authorship, provenance, etc. as the subject property) and not by purchasing or constructing a brand new replacement. An example would be an antique French armoire. Approach to value. The choice of approach to value may be affected by whether the item is appreciable or depreciable. The former may require the use of the sales comparison approach, while the latter may allow for the use of the cost approach (if, that is, constructing or purchasing a new suitable replacement is an acceptable option). There will be more on these issues later, but for now, keep in mind that some items of personal property appreciate in value while some depreciate. A primary differentiator between the two classes of property is that depreciable property (such as a refrigerator or lawnmower) can be suitably replaced with a brand new property should the need arise. On the other hand, because of its unique value-relevant characteristics such as age or provenance, appreciable property (such as an oak icebox or a 18th century Chippendale chair) cannot be suitably replaced with a brand new item they can only be replaced with comparable properties having similar value-relevant characteristics. As an appraiser, you will need to know which property is considered appreciable and which is considered depreciable. Note, too, that some property types may be considered as depreciable one day, and appreciable the next (and vice versa) as collectors' whims change. Examples include Beanie Babies and Cabbage Patch dolls. Comparable Properties A comparable property is a property of the same type as the subject property and that has relevant property characteristics which are identical or sufficiently similar to the property in question as to allow comparison for valuation purposes. Relevant property characteristics fall into two categories: 1) quality characteristics, and 2) value-relevant attributes, both physical as well as economic. (See the Chapter 5 section entitled Value Creators and Relevant Property Characteristics for a discussion of physical and economic attributes having a material effect on value.)