Using & Defining The Approach to Value In Personal Property Appraisals
In this article we describe the three basic approaches to value in addition to a derivative approach used in bankruptcy appraisals.
- Fair Market Value
- Liquidation Value
- Replacement Value
- Market Value (derivative)
The legal definition of Personal Property is Chattels, goods, property other than real property.
For the purpose of this discussion we will be speaking in terms of valuing used goods. .
Fair Market Value
Fair market value is derived from the normal selling price of an item in an arms length transaction between a willing buyer and seller without any pressure to force the quick sale.
An example of fair market value is when Joe buys an antique sign from Fred’s Antique Store and pays the price that Fred normally would sell the item for. If Joe goes to Toms used car lot and negotiates a price for a car that is in line with all of the other similar cars he had priced given that Tom was in no particular hurry to sell the car, the price would be considered fair market value.
Typically, fair market value is the approach used for valuing IRS, estate, gift and bulk sale transactions .
Liquidation value is generally defined as that value based on the price for an item that is being discounted by the seller to make the buyer act quickly even when the buyer may not have been in the market for the item. Examples would be auctions, going out of business sales, flea market & yard sales.
The liquidation value approach is often used to value assets being divided in a divorce, partnership dissolution or other situations where time is of the essence and the assets must either be divided or sold quickly.
Market Value (derivative used for bankruptcy appraisals)
Bankruptcy judges and trustees are not very favorable to appraisal reports that use the term “liquidation value”. We simply call it market value. For vehicles, machinery and equipment they want a value based on a normal selling price between a buyer and seller “as is, where is” which would be less than what a dealer would typically charge. Household furnishings, collectibles, jewelry values are based on auction, flea market, and yard sale prices. Bankruptcy trustees are most interested in what they may net from an auction of the assets should they have to dispose of them for the benefit of creditors.
Replacement Value is based on the cost to replace the item with a new one including freight and installation. This approach is most often used by insurance companies in satisfying loss claims. Depending on the way the policy is written, there may be a discount to the replacement value for depreciation due to age and wear of the item that was lost or damaged.
The approach to value that the appraiser uses is dictated by the needs of the client and his/her attorney. The approach should be decided before commencing work on the assignment Also the approach to value must be fully disclosed and defined in the assignment report, so the reader will know which approach was used.