Understanding Appraisal Types and Purposes

Updated: Apr 28

There are various types of appraisals that one may require at various times in their life. At times we criticise the fact that an appraisal is not worth the paper it’s written on, but that is typically a misunderstanding. Essentially, there are different reasons why one might wish to have an appraisal completed and different types of appraisals serve different purposes. Below is a general discussion of different types of appraisals and their purposes in order to inform your broader understanding.


Most of us think of an appraisal as a professional assessment of what something is “worth” in monetary terms. In general terms this is correct, however let’s discuss the various approaches to conducting an appraisal or assigning value and the implications of each. Three main approaches to assigning value, ordered from typically highest to lowest relative valuations, include: replacement value, fair market value and liquidation/auction value.


Replacement Value > Typically relatively higher valuations


This is what insurance companies will insure your home and contents for. It assumes that the cost of “replacing” your loss is not as simple as calling Amazon and getting a similar item. Many items are difficult to replace, and finding an item of similar quality and value costs more than simply buying off the shelf. The cost to replace a home is often much more than the resale value of the house just prior to the loss. In the case of a piece of jewellery you wish to sell, you may be able to obtain the “fair market value” by selling it on the internet. However, if you wish to buy one exactly like the one lost, you may have to go to a jeweler and pay retail, which is more like replacement cost.


Fair Market Value > Typically relatively mid-range valuations


This is what we most often default to. Generally described by various authorities as the price a willing buyer would pay to a willing seller with no undue influence on either side. In the case of real estate, this is a prediction of what a property would sell for in a reasonable time period if exposed to the market in an open broad form, often associated with MLS.


When a house is sold and the mortgage company sends an appraiser to ensure the property value is consistent with the mortgage being requested, they are following this theme. When an agent advises a seller on listing price, they are thinking along these lines, however there are always homeowners who are “testing the market” by listing well over “appraised value” with the idea that if they get a particular price, they would sell.


When we look at estates, probate requires appraisals be for fair market value. When it comes to estate contents, the issue is a bit more challenging and in my view the requirements may evolve over time. For now, probate filing (tax paying) is to reflect the fair market value for the assets owned by the deceased at the time of death. When it comes to household contents, vehicles, antiques, jewelry, all items should be valued with a view to “what would they be worth in monetary terms if sold at the date of death”. In other words, what could the estate obtain for the goods in a properly conducted sale. There are complexities but essentially this is the task. For estate trustees, obtaining a professional certified appraisal is the safest route to go.


Liquidation/Auction Value > Typically relatively lower valuations


This is what you are dealing with in practical terms if the task is to clear a quantity of merchandise from a location in a finite time period. It reflects the reality that space costs money and often the space that houses the items requiring a sale is not available indefinitely. The liquidation value is a prediction of what these items could obtain under these circumstances.


Conclusion


In critiquing appraisals, one might look at a fair and reasonable “replacement value” appraisal and think it is meaningless in the context of a “liquidation” requirement, which may in fact be true. Nonetheless, understanding the definitions and appraisal purposes and ensuring that they are properly applied is critical to properly evaluating appraisal results.


If you’d like to learn more about Gordon’s Downsizing & Estate Services appraisals and related services, please contact us for a free no-obligation consultation. We are here to help.