- 40 - Chapter 1: Appraisal Terminology USPAP defines an Extraordinary Assumption as: EXTRAORDINARY ASSUMPTION: an assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser s opinions or conclusions. Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. Extraordinary assumptions must be clearly disclosed in the appraisal report, and the report must notify intended users that the extraordinary assumptions might have affected the assignment results. (The appraiser need not report on the impact of this assignment condition only that it might have affected the assignment results. (2014-2015 USPAP FAQ #214)) No Label Required Though an extraordinary assumption might be employed in an assignment, there is no USPAP requirement that it be labeled as such. USPAP requires that the extraordinary assumption be clearly and conspicuously disclosed, and that it be disclosed that the extraordinary assumption might have affected the assignment results, but there is no requirement that it be labeled extraordinary assumption although many appraisers choose to do so. (2014-2015 USPAP FAQ #215) Non-Extraordinary Assumptions Not all assumptions are extraordinary. Non-extraordinary assumptions are based on information provided by the client and might include such assumptions as the date of death in cases of estate appraisals, the date of donation for a noncash charitable contribution appraisal, that the client owns 100% interest in the appraised property, or that the property has clear title. Disclosing assumptions or stating that they might have affected assignment results is not required by USPAP as it is required for extraordinary assumptions. Hypothetical Condition A hypothetical condition is another type of assignment condition. Hypothetical conditions are conditions that are contrary to what actually exists as of the effective date of the appraisal, but that are supposed to exist for the purpose of the appraisal assignment. Hypothetical conditions give rise to what are referred to as hypothetical appraisals. As an example, to assist in the determination of an equitable settlement in a damage claims appraisal, you may be asked to determine replacement cost for damaged property assuming it was in good condition and not damaged at all. In such a scenario, you assume a hypothetical condition, i.e., that the property is in undamaged condition when, in fact, it is not. For another common example consider a client who owns a rare and potentially valuable clock that is in poor condition and that the owner is considering having restored. Clock restoration is often expensive, particularly if the mechanism is complex or if restoration of the case is also
Chapter 1: Appraisal Terminology - 41 - involved. Before the restoration is undertaken, in order to decide whether the potential value of the clock warrants the expense of restoration, the client asks the appraiser to estimate the clock s value assuming that it has been professionally restored. The appraisal is hypothetical because the clock will not have been restored as of the effective date of the appraisal. It will be, in fact, in a poor, non-working condition as of the effective date. HYPOTHETICAL CONDITION: a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis. Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.(uspap) Hypothetical conditions must be clearly disclosed in the appraisal report, and the report must notify intended users that the hypothetical conditions might have affected the assignment results. (Again the appraiser need not report on the impact of this assignment condition only that it might have affected the assignment results. (2014-2015 USPAP FAQ #214)) No Label Required Though a hypothetical conditions might be encountered in an assignment, there is no USPAP requirement that it be labeled as such. USPAP requires that the hypothetical condition be clearly and conspicuously disclosed and that it be disclosed that the hypothetical condition might have affected the assignment results, but there is no requirement that it be labeled hypothetical condition. (2014-2015 USPAP FAQ #215) Jurisdictional Exception A jurisdictional exception is a type of assignment condition that is established by an applicable law or regulation which precludes the appraiser from complying with a part of USPAP. If any section of USPAP is contrary to applicable laws or regulations, then the appraiser is excused from complying with that section of USPAP. Jurisdictional exceptions preserve the balance of USPAP if one or more of USPAP s parts is in conflict with local laws or ordinances. Jurisdictional exceptions primarily affect the real property appraiser and rarely impact the personal property appraiser. Should they apply, however, jurisdictional exceptions must be disclosed in the assignment report. An example might be an appraisal done for the probate court in a state which has a statute stipulating that appraisal fees for these types of assignments shall be based on the appraised value of the property an obvious violation of USPAP which prohibits such a contingency fee. This is an example where the JURISDICTIONAL EXCEPTION RULE applies. In order to comply with the requirements of the JURISDICTIONAL EXCEPTION RULE, the appraiser must disclose in the appraisal report the reason(s) that prohibit compliance with the USPAP prohibition against contingency fees, and cite the basis for the jurisdictional exception.
- 42 - Chapter 1: Appraisal Terminology (See the section entitled JURISDICTIONAL EXCEPTION RULE in Chapter 7 for a related discussion.) Purpose of an Assignment (Appraisals, Appraisal Reviews) An appraisal is but one of two types of appraisal practice assignments governed by USPAP. The other type of appraisal practice assignment governed by USPAP is the appraisal review. Each of these two types of appraisal practice service has its own type of purpose. The vast majority of appraisal practice assignments performed by the personal property appraiser, however, fall within the category of appraisal assignments. While USPAP also applies to appraisal reviews, the volume of appraisal reviews performed by the personal property appraiser is miniscule when compared to the volume of appraisals performed. Consequently, the focus of this book will be primarily on appraisal assignments. Note that in earlier versions of this book instead of the term purpose of an Updated! assignment we used the term objective of an assignment. Changing to the term purpose better reflects USPAP nomenclature. For instance, USPAP s SANDARDS RULE 3 focuses on appraisal review assignments. Standards Rule 3-2(c) states that when developing an appraisal review, the reviewing appraiser must (among many other things), Identify the purpose of the appraisal review. [emphasis added] And Standards Rule 3-5 requires that the appraisal review report must (among many other requirements), State the purpose of the appraisal review. [emphasis added] For all intents and purposes, the two terms can be used interchangeably, but for purposes of this book we will use purpose. Purpose of an Appraisal Assignment The purpose of an appraisal is the reason for which the appraisal is being done, i.e., the objective is what the appraiser is seeking. Each appraisal assignment has a purpose which calls upon the appraiser to develop and communicate an opinion of value to the client and perhaps to other intended users as well. For appraisal assignments, purpose corresponds to the type of value identified by the appraiser as appropriate for that particular assignment. The purpose of an appraisal assignment is identified by the appraiser, but, of course, in consultation with the client. The purpose of an appraisal assignment is monetary in nature, i.e., the purpose is to determine an opinion of a defined type of value (either as a point value, as a range of values, or as a relational value (more than, less than, etc.)) as of a specific date. o Point values. Examples of an appraisal purpose being a point value would be to develop an opinion of fair market value for the intended use of a noncash
Chapter 1: Appraisal Terminology - 43 - charitable contribution, or to develop replacement value (new) for a flat screen TV. o Range of values. An example of developing a range of values might be for a client who, intent on selling a property, requests that the appraiser develop an opinion of a range of values within which the client could negotiate the sale. Another example would be a client who asks the appraiser to only provide comparable sales data for the subject property. If the appraiser exercises judgment to decide which market data is most comparable and provides only that data to the client (while excluding other data), then the appraiser has prepared an appraisal by, in effect, providing a range of value opinions to the client. o Relational values. On occasion, a client simply wants to know if the market for a previously-appraised property has changed and whether the value of the subject property has remained the same, increased or decreased since a prior appraisal. In making a determination one way of the other, the appraiser is performing an appraisal as defined in USPAP. Non-Monetary Opinions At times, though, appraisers may also be asked to give opinions that are non-monetary in nature, e.g., to give an opinion as to authenticity, condition, or the most lucrative means of marketing. Appraisers may be asked to do this while performing as an appraiser or they may be asked to provide these non-monetary opinions while acting outside the role of an appraiser, such as might be the case if the appraiser was also an auctioneer, dealer or estate liquidator. Note that non-monetary opinions are not appraisals, but may be governed, nonetheless, by certain parts of USPAP depending on whether or not the individual providing the nonmonetary opinions is representing him or herself to the client as performing as an appraiser. We ll address this topic later in Chapter 7 which focuses on USPAP and when USPAP applies to the individual while performing as an appraiser as well as while performing as a non-appraiser. Supplemental reading: o USPAP STANDARD 7 Personal Property Appraisal, Development and STANDARD 8 Personal Property Appraisal, Reporting Purpose of an Appraisal Review Assignment The purpose of an appraisal review is to develop and communicate an opinion about the quality of another appraiser s work, i.e., a determination whether or not the assignment under review is consistent with the requirements of the engagement letter which sets forth the scope of the appraisal assignment under review. Review appraisals may or may not include a requirement for the appraiser to develop an opinion of value. Supplemental reading: o USPAP STANDARD 3 Appraisal Review, Development and Reporting
- 44 - Chapter 1: Appraisal Terminology (See the Chapter 7 section entitled When Must an Appraiser Comply with USPAP for a related discussion.) Market A market is not necessarily a specific location but rather it is a concept which represents commercial activity whereby goods and services are exchanged typically for money. Selecting the most appropriate market to research when gathering comparable market data on which to base an opinion of value is of paramount importance to every appraisal assignment. The assignment s scope of work and the intended use of an appraisal will direct Updated! the appraiser's research and choice of which market and market levels (see below) the appraiser must research in order to obtain the necessary market data on which credible value conclusions can be based. The appraiser must not just focus merely on individual transactions that occur within the market. In addition to understanding individual transactions, it is critical that the appraiser understands the market itself as a whole including: Who are the typical buyers and sellers? What are their motivations to buy or sell? Are they under pressure to buy or sell? Are they knowledgeable of relevant facts? Are they acting in their own self interest? Is the market active or dormant? Is the market local, regional, national, or international? Are values increasing or decreasing?, etc. Level of Trade In general, there are four types of markets that the appraiser may have occasion to research. These are referred to as levels of trade. This term refers to a merchandising structure characterized by different trading levels having different price points at which the merchandise is bought and sold, so each level of trade generates its own set of data. The primary differences between these four levels of trade are the market participants (e.g., an end user vs. a re-seller) and the time frame available for transactions to occur (e.g., no time limit such as a retail store, nominal time frame such as an estate auction, very limited time frame such as a forced-sale). The Comment to Standards Rule 7-3 of USPAP states: The appraiser must recognize that there are distinct levels of trade [emphasis added] and each may have its own market value. For example, a property may have distinct value at a wholesale level of trade, a retail level of trade, or a value under varying auction
Chapter 1: Appraisal Terminology - 45 - conditions. Therefore, the appraiser must consider the subject property within the correct market context. The four markets (i.e., the four levels of trade ) commonly used by the appraiser are: Retail market. A retail market is the market in which items are sold at retail, i.e., to the end user. The end user is one who does not purchase for resale at least not in the property s current form. Examples of retail markets include discount stores, antique shops, art galleries, jewelry stores, consignment shops, department stores, etc. o Current form. In the retail market, goods are sold to the end user who retains the property without the intent of reselling the item at least not in its current form but may resell if the form is changed. As an example, an automotive junk yard is the retail customer for a junked car because the yard does not typically resell the junked car as-is. They resell the parts (and in doing so they changed the form ), but not the vehicle itself. Thus, the junk yard is a retail buyer of junked cars. In a similar manner, a used bookstore is a retail buyer for a very large number of used books because the bookstore would not typically resell the lot. Instead, they would break up the collection and resell it piecemeal, i.e., in a different form. Wholesale market. A wholesale market is the market in which wholesalers sell to the trade (i.e., to those who purchase with the intent of reselling the property in its current form). Antique dealers buy from the wholesale market for resale to the public. Orderly liquidation market. An orderly liquidation market is the market in which property is regularly sold in an orderly and advertised fashion but for which nominal but adequate time constraints apply, i.e., there is reasonable exposure time. Examples of an orderly liquidation market include auction galleries, on-site auctions, and estate tag sales. Forced liquidation market. A forced liquidation market is any market in which property is sold quickly, within a very restricted exposure time frame, and often without regard to the most appropriate (i.e., most lucrative) marketplace. A short-notice auction of the contents of a storage unit at a local self-storage facility is an example of a forced liquidation market. The give-away prices adopted to entice a sale in the concluding hours of an estate or yard sale is another example of a forced liquidation market. Appraisers must make use of the most relevant level of trade, i.e., the market that best reflects the type and definition of value being developed by the appraiser which, in turn, is based on such issues as the intended use of the appraisal, the needs or requirements of the client or other intended users, or, perhaps, on markets mandated by law or regulation, such as by IRS regulations which require the use of the market in which retail sales most commonly occur to the public. Market Level The Comment to Standards Rule 7-3 of USPAP states: In the context of personal property, highest and best use may equate to the choice of the appropriate market or market level [emphasis added] for the type of item, the type and definition of value, and intended use of the appraisal.
- 46 - Chapter 1: Appraisal Terminology Within a specific market there exist differing market levels, i.e., examples of the market, which often offer the same product for a different price thus appealing to a different class of buyers. For instance, consider examples of market levels within the retail market for an appraisal being done for the purpose of the client acquiring insurance coverage. There are upscale department stores offering goods at full manufacturer's suggested retail price (MSRP), and then there are retail discount stores (brick-and-mortar or online) which offer the same merchandise for less. A sterling silver flatware service can be purchased from a posh department store for full retail price, but the service can also be purchased from discount stores for 20% off retail. In addition, the silverware can often purchased from Internet replacement services for 50% off retail. In a similar manner, there are various market levels for the forced liquidation level of trade. Depending on several factors including the amount of time available to expose the property to the marketplace, examples of the forced liquidation level of trade could include auctions, yard sales, estate (tag) sales, online auctions, or a lot sale (the whole lot for one price) directly to a dealer. (See the Chapter 8 section entitled Most Appropriate Market for a complimentary discussion of this topic.) Primary vs. Secondary Markets Retail markets can be categorized as either a primary or as a secondary market. A primary market is a market in which new items that are still being created by the manufacturer are available for sale for the first time. A gift store is an example of a primary market for Hummel figurines that are still in production. An example of a primary market for current-model flatscreen televisions and cell phones is a home electronics store. A secondary market is a market in which items that are still being created by the manufacturer are being resold to subsequent owners. Examples of a secondary market for current-model sofas and television sets might be through classified ads in the local newspaper, via Internet re-sale sites such as Craigslist.com or at local auctions or estate sales. In such cases, the items are still in production and are still available through a primary market, but they are also being resold to a new owner within a secondary market. Note that such items being purchased on the secondary market are still available (normally at a higher cost) through the primary market. Consumers are usually willing to pay more for the property through a primary market because with purchases through a primary market the consumers obtain an unused property complete with original packaging, warranties, the right-of-return, and often with financing. These benefits are typically unavailable when purchasing the same item at the secondary level. When items are no longer being created by the manufacturer, the secondary market becomes the primary market. Items such as antiques and collectibles, retired Hummel figurines, discontinued sterling silver flatware services, and dinnerware services that are no longer in production are obtained from dealers, auctions, yard sales, Internet websites, etc. These sources have now become the primary market for items that are no longer being created by the manufacturer.