Why You Might Need an Appraiser, and What Terms to Know
I’m a real appraiser, I don’t just play one on TV. So, I get questions on the topic, and a lot of them are about terminology. Since some of it can be confusing, here’s a cheat sheet to let you in on some of the basic terms you might find on your appraisal and what they mean, as well as what appraisers actually do, and what they don’t do.
As to appraisal and valuation, there are only three approaches to valuation. These are the Cost approach, the Income approach, and the Market (sometimes called Marketplace) approach. It is the appraiser’s job to review the possible approaches, and choose the one that is appropriate to answer the appraisal’s key question: “How much is the object worth?” The most common approach used for automobiles is Market, the familiar approach that uses previous, comparable sales of similar vehicles as examples. (Just to make things more confusing, appraisers are now dropping the comparables name and using the more comprehensive name of “Marketplace Examples”).
It is also important to note that every personal property object, including your car, actually has multiple values. These include, but are not limited to:
Fair Market Value is the most widely accepted standard of value. The key word in the phrase is market. The IRS defines fair market value as “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge or relevant facts.”
In other words it’s the price an asset would bring in a sale between a buyer and seller who are each aware of market conditions and under no undue need to sell or buy. In a fair market value transaction, the fair value market price of the asset is set by the market. It is supported by the price similar assets have brought in market transactions, and assumes that sellers and buyers are rational actors who would not substantially overpay (in the case of buyers) or underprice (in the case of sellers). (This description is from Valentiam Group, an independent and transfer pricing group).
Replacement value refers to the amount someone would have to pay to replace an asset with a similar one at the present time, according to its current worth. The insurance industry most commonly uses replacement value, aka “replacement cost” or “replacement cost value,” to determine the value of an insured item in the event of a claim. This amount can be similar to or even the same as fair market value, but the two aren’t directly related.
In short, fair market value is simply what a vehicle will cost to buy on the open market. Replacement value is what it will cost to replace a vehicle if it is lost, and this may include the cost of unique parts and specialized labor to adequately recreate that lost vehicle.
Orderly liquidation value falls somewhere in between forced liquidation value (where an asset’s seller is under time constraints to sell it quickly) and fair market value. The car has to be sold, but there is an adequate amount of time to get the job done. In the case of a collector vehicle, this may be a few months but not more than a full year. The vehicle will net less than it would at fair market value, but usually quite a bit more than under forced liquidation.
Another very important thing to point out is that appraisers are not authenticators. In some cases, appraisers can authenticate cars, because of their knowledge of a particular kind or type of car, but that would be one person changing hats. An appraiser observes and reports what they find, conducts research, and then reaches a conclusion as to a vehicle’s monetary value. Appraisers are, in essence, valuers. An authenticator inspects a vehicle in order to determine whether it is or is not what it is represented to be. If you need your car authenticated, you should search out someone with those specific skills. Over my 30 years in the appraisal business, I’ve seen appraisers get in over their heads when they attempt authentication, and authenticators find themselves making bad choices when they take a crack at valuation.
Another concept that some find hard to accept is this—appraisers do not determine value, we estimate value. An appraisal is a snapshot of the article to be appraised, frozen in time. The sale of a car is a hypothetical event until it happens. Let’s say the appraiser’s task is to value a Mercedes-Benz 300SL Roadster. The appraiser should note that it is a disc brake car with fitted luggage, replica Rudge wheels, a hardtop and one of the desirably late alloy engine blocks, as reported by the seller. The appraiser takes this into account, along with the SL’s condition and all other pertinent details to reach an informed estimate of its value.
But, again, this is an estimate. Remember fair market value? Even a concept as well defined as “willing seller meets willing buyer” has hundreds of potential variables to contend with. The appraiser can make the assumption that the buyer will act in their own best interest, but that does not always happen. What the appraiser often does not know is where the car is to be sold? When will it be sold? Will the wheels be disclosed as reproduction at the time of sale? Will the luggage and hardtop be sold with the car? Will the front fender get scratched en route to the sale? Will the 300SL be on Craigslist with one grainy photo or at a fancy in-person auction with a glossy catalog of its provenance and copies of the full restoration records? All these things, plus many more, will factor into the potential price the seller will receive.
If you think that a comprehensive appraisal is just like what you see on the Antiques Roadshow or similar, you have been misled. Proclaiming value is not what you pay a professional to do. You pay for the research, the education, the ability to rank the object in relation to its peers, and the ability to write a document that sums it all up in an understandable fashion. Remember, the simple “what’s it worth” question can have multiple answers, all of them correct.
This is something too many over look till late.
I recognize that Beetle. 😀
As an appraiser, I appreciate your taking the time to define terms. Estimated and educated opinion are important words. Its a fascinating job and very fulfilling when the client understands and benefits from the final report.
Dave, question what about the guys and gals at the high end auction houses like Bonhams or Sotheby’s It appears when they are assigned a collection they both authenticate and appraise the cars. Many of their employed seem to perform both?
For an accurate assessment call – ‘Dewey Cheatem and Howe.’
Wish I owned something that was valuable enough to require the application of this information. In my world, though, “What’s it worth?” is best answered by, “What’ll you give me for it?”
and that’s what it’s worth. You can hire an outside appraisal to tell you anything you want to hear, but it’s only worth what someone will give you for it.
Dave,
Concise and informative, as I have come to rely on from you.
Thanks.
As one who has worked as an insurance claims adjuster, classic car appraiser and dealer of specialty cars I have seen the term “appraiser” and “appraisal” abused beyond belief. I have even had the experience of needing an appraisal on one of my own cars (and ethically, I cannot appraise anything I have an interest in) and contacting one advertising themselves as an “appraiser” and the first thing he asks is “How much do you want this thing appraised for?” So, knowing this, when I’m wearing my insurance hat, I tell my clients a mere sheet of paper headlined “Appraisal” is no guarantee that it won’t be rejected if it wasn’t objectively arrived at, by someone qualified.
Orderly liquidation value is a new term to me. I have not heard that one before.
How can I hire you to appraise an auto for me?
David
Something else to bear in mind: an appraiser (using that term very generally, in this case) who works *for* an auction house or dealer is (or should be) acting in his employer’s best interest, not yours. If you want a true appraisal, and not an opinion as to what a particular auction house or dealer might like to see (to move the object and make a quick commission – from both ends of the transaction), you should engage your own appraiser.
The same holds true for insurance agents vs brokers. An agent works for the Company (*one* company); a broker works for you (assuming his commission is the same across the offerings he has).