"To Be A Better Seller (or Buyer), Know Appraisal Lingo"

By Brian Hennig

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Most of us are confident we know the value of equipment we own. After all we know what we paid for it, what it is costing us to maintain, and what income it is generating for us.

The more challenging questions to answer are:

What’s it worth to someone else? What is it worth to an independent third party whose motivation in buying your equipment is to maximize their own financial interests? What is it worth to the financing company whose interest in is assuring payback on a loan? What is it worth to the fleet manager who needs a particular piece for a specific application? What is it worth to the insurance company who is insuring the equipment for its replacement cost?

The appraisal profession has its roots in the real estate industry where property appraisals provide the basis for mortgage lending. Equipment appraisals were initially introduced by the insurance industry as a means to determine the replacement cost of a damaged or stolen piece of equipment.

When banks began securing loans with equipment it was not uncommon for the contractors to supply both the equipment list and their own opinion of the equipment’s value directly to their banker. Then the Savings and Loan Fiasco of the 1970’s and 1980’s hit and the appraisal industry was held directly responsible for fraudulent real estate valuations resulting in tremendous financial losses and a federal bailout of the lending institutions. In the late 1980s the “Uniform Standards of Professional Appraisal Practice” (USPAP) was recognized in federal law and provides a framework for appraisal industry standards, skills, tools, and enforcement. Today, real estate appraisers are required to be certified by the state in which they practice. Professional appraisers in other disciplines such as Business Valuation, Personal Property, and Machinery & Equipment must adhere to USPAP in order to be a member in good standing of a major appraisal society.

How does USPAP affect the equipment owner or fleet manager?

The benefit of USPAP is its uniform standards for developing a reliable valuation conclusion. It requires the appraiser to clearly state all relevant facts and demonstrate how they lead to the stated value. It reinforces the requirement that the appraiser must be an independent and unbiased source who has fiduciary responsibility to the customer and any unknown third party user of an appraisal report. And, increasingly, USPAP is cited in legal actions as the standard by which valuations are measured for competency.

Appraisals may be performed for an owner, interested buyer, attorney, accountant, insurance company, loan officer, widow, partner, interested seller, equipment dealer, etc. The reason for an appraisal and the customer profile becomes more varied every year. As a result, the issues of appraisal standards have become extremely important.

How can machinery have so many different values?

In the old days equipment had a high and a low value, often called market value or fair value and quick-sale or auction value. As time passed the creativity of commerce lead to several dozen versions of these values, each with a slightly different stated or implied meaning.
In order to operate with a common terminology, the appraisal profession has developed numerous value standards and definitions for equipment. Some of the more common values used in conjunction with construction equipment follow:
  • Fair Market Value (FMV): the most widely recognized and accepted standard of value, known as the price at which property would change hands between a willing buyer and a willing seller, both adequately informed of the relevant facts and neither being compelled to buy or sell.
  • Fair Market in Use (FMV-IU): commonly used when valuing fixed processing plants. This assumes that the facility will continue to operate profitably in place and goes a step beyond FMV by taking into consideration installation costs of the facility which are depreciated over the expected life of the facility.
  • Orderly Liquidation Value (OLV): the price that would typically be realized from a sale, given a reasonable period of time to find a purchaser(s), with a seller being compelled to sell on an “as-is, where-is” basis. This is often considered a “wholesale” value that a dealer or broker would pay for equipment.
  • Liquidation Value (LV): a standard similar to OLV listed above, but with the distinction of a “forced” liquidation that assumes the assets must be sold with a sense of immediacy on an “as-is, where is” basis as of a specific date, either piecemeal or through a bulk sale.

Which value is appropriate?

Equipment owners can be of the opinion that since they paid “x” for a unit and operated it for “y” years, the resulting depreciated value should be “z”. However, the original price and cost of a unit doesn’t necessarily relate to its current value. Ever heard of who paid too much for an item or the opposite, got a great deal? A retail price or list price from an equipment dealer rarely reflects a fair market value. A retail sale from a dealer includes either a stated or implied warranty and typically represents a premium in excess of FMV. In addition it is not uncommon for the retail purchase price to vary dramatically from the retail list price given factory incentives, quantity discounts or “market” pricing practices.


Portable Asphalt Plant When beginning an appraisal assignment, it is the responsibility of the appraiser to advise the client which value definition is most appropriate for a given valuation assignment. For an owner contemplating a sale of equipment, FMV or a combination of FMV and OLV will often be included in the assignment. For a buyer considering the purchase of a fixed batch plant with the intent of continued operations, either FMV or FMV-IU might be used. If, on the other hand, a fixed plant is to be purchased and relocated, then the valuation would focus on the value of re-usable plant components in terms of FMV or OLV. In other words, the value or values incorporated into the appraisal project needs to fit the use of the appraisal in order to be relevant.

You may be asking, what happened to “auction value”? Auction value is a misnomer and is seldom used any more as a value standard. It had more meaning 30 years ago when buying at auction was roughly the same as wholesale or liquidation value. However, today an auction is more correctly seen as a sales vehicle or a marketing tool, and the prices realized at auction can vary from retail to less than scrap depending upon any number of circumstances: from the auctioneer, the equipment mix, the location, type of advertising and promotion, size of crowd, economic conditions, and even unseasonable weather. An auction can produce a variety of sales results.

Author biography

Brian Hennig is an Accredited Senior Appraiser of the American Society of Appraisers. He is president of Hennig & Company based in Mountain View, California. He is also the principal of Higdon Inc of Albuquerque, New Mexico. His firms specialize in the appraisal of construction related equipment. He can be reached at 650-961-6642 or info@henniggroup.com.





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