There are persons in my profession who unwittingly undercut themselves when they believe that they are acting competitively. Like a dog chasing its tail, those individuals will probably not catch the elusive thing. They will continue chasing their perceived market with deceiving self-platitudes about how professional they are. But are they giving the client thoroughness and real value?
This deceit will destroy the quality of talent and decision making logic as well. Is it logical to give away one’s profession with poor judgment and poor economics? What is professional other than something or someone who has taken the trouble to learn through sacrifice and work?
Machinery and technical specialists work hard to make a living as professional valuation experts. My appraisal society strives to make their members professional through education, participation and a designation that is difficult to get but means something to those who aspire.
The definitions one finds in dictionaries and that great electronic tome in cyberspace, Wikipedia, “the free encyclopedia,” tells us that “A professional is a worker required to possess a large body of knowledge derived from extensive academic study, usually tertiary, with the training almost always formalized.”
“Professionals are at least to a degree self-regulating, in that they control the training and evaluation processes that admit new persons to the field and in judgment if the work done by their members is up to standard.”
Unlike real estate, personal property appraisal of which machinery and technical appraisals fall are not regulated or licensed. Personal property appraisers who strive for professionalism reinforce their standards through recertification. This means renewing our vows so to speak. We are required, every five years, one-hundred credit hours of education, participation in our society, and seven to fifteen hours of The Uniform Standards of Professional Appraisal Practice, USPAP.
All of this upkeep over five years means that we have to spend our money and time to achieve those one-hundred hours plus keep an office, pay ourselves and pay our taxes. As independent appraisers this paying of self gets more difficult as the playing field is inundated with legal and financial gopher holes.
Many of the people in our profession come from another life before they become appraisers. They may already have some financial independence that makes it easier to compete with neophytes who would enter the profession. They are also highly experienced with the knowledge to back opinions of value. But, this comes with a cost.
In addition to necessary living expenses it is mandatory to keep up our professional credentials. We are professional because we belong to a society whose regulations include ethics, minimum appraisal standards and rules of the road. This is inline with other professions.
Attorneys, CPA’s, and doctors are required to meet ethics and professional standards. In the technical appraisal field we have similar requirements but there aren’t as many of us.
What are appraisal services worth? I’m not speaking just in an economic sense, but through the sense of thoroughness and pride in an assignment well done.
Trades people like plumbers and electricians get “trip-time” and use a book to price services. You know they aren’t inexpensive. Are professional appraisal services worth at least a plumber’s hourly rate? Appraisers wonder sometimes about the client’s perception when an appraisal is proposed. What is a professional appraisal?
At the turn of the 20th Century, economist and sociologist Max Weber ( Maximilian Carl Emil Weber [maks vaybere] 1864-1920), said “professions are defined by the power to exclude and control admission to the profession, as well as by the development of a particular vocabulary specific to the occupation, and at least somewhat incomprehensible to outsiders.”
Now, I don’t believe that appraisers are a band of trained, gibberish speaking monkeys. We do try to achieve professionalism as Max Weber pointed out through:
1. The highest academic qualifications, i.e., university, college or other education not available to the general public.
2. Expert and specialized knowledge in field which one is practicing professionally
3. Excellent manual/practical and literary skills in relation to profession
4. High quality work in . . . creations, products, services, presentations, consultancy, primary/other research, administrative, marketing or other work endeavors.
5. A high standard of professional ethics, behavior and work activities while carrying out one’s profession as an employee, self-employed person, enterprise, business, company, or partnership/associate/colleague, etc.
It may be that I am overly conscientious, but I appreciate a job well done as well as the client does. I almost always exceed my estimated time but stay firm on the quoted estimate. I’ll later berate myself of selling short. I know what I’m worth, but try and convince a client that you can’t work for less than break even is difficult.
Lately, I’ve had to invoke that little piece in my engagement letter that says if I get more involved that originally contracted for, or the client starts slipping in more than contracted for, that they have to pay. Most clients are reasonable that way, but there are a few that will balk.
Attorneys and accountants generally bill by the fifteen-minutes whether it is face time or phone time. Appraisers normally couldn’t do that, but a continuing high cost of living may push us to it. Independent appraisers incur expenses for dues, education, travel to and from seminars and the upkeep of their credential.
Technical appraisers should bill fairly, bill equitably, but also bill professionally. Price competition is one thing but the old adage stands that the competition knows what their services are worth.
Monday, April 28, 2008
Friday, April 18, 2008
Non Cash Charitable Donations
Appraisals for Non cash Charitable Deductions?
There is a nasty wrinkle in IRS document 8283. The next time you are contemplating an appraisal requiring form 8283 please be familiar with “Part III, Declaration of Appraiser.” Read the fine print before you sign, second paragraph about half-way through which states:
Furthermore, I understand that a false or fraudulent overstatement of the property values describe in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (adding and abetting the understatement of tax liability) In addition, I understand that a substantial or gross valuation misstatement resulting from the appraisal of value of the property that I know, or reasonably should know, or reasonably should know, would be used in connection with a return of claim for refund, may subject me to the penalty under section 6695A. . . .
Oh yes, you can bet that I am thinking mightily about the IRS because I appraised over one-million dollars in charitable tax donations last year. All well researched and documented, but having worked for the IRS in similar matters I can assure you that the service does not skim easily over large donations. I’m waiting for the letter.
My question to appraisers: have you decided to scale back on any appraisals involving the taxpayer and the IRS? I’ve put a statement in my engagement letter, in red script that any legal fees involving the defense of the appraisal will be on the client. You can guess accurately how many tax related appraisals I have done since inserting that statement.
If you have any questions about Noncash Charitable Contributions you may download the entire IRS Publication 526 from the U.S. government website.
There is a nasty wrinkle in IRS document 8283. The next time you are contemplating an appraisal requiring form 8283 please be familiar with “Part III, Declaration of Appraiser.” Read the fine print before you sign, second paragraph about half-way through which states:
Furthermore, I understand that a false or fraudulent overstatement of the property values describe in the qualified appraisal or this Form 8283 may subject me to the penalty under section 6701(a) (adding and abetting the understatement of tax liability) In addition, I understand that a substantial or gross valuation misstatement resulting from the appraisal of value of the property that I know, or reasonably should know, or reasonably should know, would be used in connection with a return of claim for refund, may subject me to the penalty under section 6695A. . . .
Oh yes, you can bet that I am thinking mightily about the IRS because I appraised over one-million dollars in charitable tax donations last year. All well researched and documented, but having worked for the IRS in similar matters I can assure you that the service does not skim easily over large donations. I’m waiting for the letter.
My question to appraisers: have you decided to scale back on any appraisals involving the taxpayer and the IRS? I’ve put a statement in my engagement letter, in red script that any legal fees involving the defense of the appraisal will be on the client. You can guess accurately how many tax related appraisals I have done since inserting that statement.
If you have any questions about Noncash Charitable Contributions you may download the entire IRS Publication 526 from the U.S. government website.
Thursday, April 17, 2008
Appraising Clutter
Appraising CLUTTER
By: Alan C. Iannacito, ASA
Clutter: we’ve all seen it, been stuck between it and worried exceedingly -- how to value the stuff? Stuff in the corners, stuff in the back room, stuff in the warehouse, stuff in the bone-yard.
In many cases the bone-yard is a temporary place for seasonable equipment. For example, the photo below shows a mix of seasonal items, obsolete equipment and scrap.
(photo not available)
Seasonal fish net/pots, tables and conveyors with the retired equipment of a Kodiak Island fishery.
Dealing with industrial mess is a matter of recognition, experience, and triage. Appraisers are asked to find value in clutter.
To begin:
• Ask the responsible plant staff what they want included and how important are the minor items.
• As you walk through, organize the items in your mind as well as on the listing.
• Classify equipment by utility and apparent value.
• Are the items obsolete or seasonal? Do they have future use at the location?
• Is the item important or is it in the pile because no one knows where it is, or has someone saved it because they thought that they may need it someday?
• Was it ordered and dumped because the plant really doesn’t need it now?
• Is it still on the personal property tax schedule?
Often idle equipment is brought from another plant and dumped for lack of a better place to put it. Maybe, the appraiser is the only reliable organizer because of fresh eyes or curiosity that wants answers. If we don’t know we ask. The example below was found in the corner of a hanger plant.
This Hanger/Cape machine, inherited from another plant, was buried behind boxes and work-in-progress. It has a limited market, and is of no use to the present location, but still has market value.
The above machine was placed on the manufacturing floor, but abandoned in place and hidden. In the same plant, I squeezed between, or walked from the tops of the equipment over machine tools, hanger wire formers and unrelated machinery. The inherited machines were shoved into a corner of the plant.
I listed the most marketable machine tools, lumped old an incomplete machines and made a note that the remainder had little or scrap value. I asked the people in charge before I discarded what I thought were cripples. Some of the nastiest looking equipment may have further use.
In appraisals of multiples in the bone-yard and castaways, it isn’t practical to value each piece by the cost, market, and income approach. The fees and expenses don’t warrant an estimate of each as in-place-in-use value, and estimating the economic life and cost-to-cure.
However, if the equipment is seasonable, i.e. canneries, fisheries, holiday specialties, sewing equipment, weather related equipment, it may have been shoved into a corner because there is no other place to put it. Appraisers still have to find such items and list them.
Pick out the machine in the picture below that has real value -- it’s not the old wash machine or the hose crimp in the background. (photo not available)
Foreground: 25LB “New Little Giant” Forging Hammer probably made about 1912 as an “improved” version with a wrap around hammer guard.
The “New Little Giant” forging hammer above looks like a display from a Smithsonian Museum, and it could be. Some of these machines, still in use, are over 100 years old. A blacksmith or metal artist can buy parts for the machine, and there are people in the blacksmith’s trade that rebuild and sell these machines. The one pictured has a market at $1500 in its present condition. Rebuilt 25LB trip hammers sell in the $5000 range. They have a mystique and an intrinsic value.
When I first saw the “New Little Giant” I was tempted to write it off as scrap. However, I found the name, and through the internet I found a community of trip-hammer users. For this appraisal the trip-hammer was a minor item, abandoned in the old forge shop. The owner forgot about it but remembered that someone had made an offer of $850 for the hammer a few months before the appraisal.
Past assignments have asked me to find and appraise industrial artifacts; old things that someone thinks have value. Clutters of foundry patterns are one example of what the manufacturer or a museum sees as valuable, when the market sees them differently.
By: Alan C. Iannacito, ASA
Clutter: we’ve all seen it, been stuck between it and worried exceedingly -- how to value the stuff? Stuff in the corners, stuff in the back room, stuff in the warehouse, stuff in the bone-yard.
In many cases the bone-yard is a temporary place for seasonable equipment. For example, the photo below shows a mix of seasonal items, obsolete equipment and scrap.
(photo not available)
Seasonal fish net/pots, tables and conveyors with the retired equipment of a Kodiak Island fishery.
Dealing with industrial mess is a matter of recognition, experience, and triage. Appraisers are asked to find value in clutter.
To begin:
• Ask the responsible plant staff what they want included and how important are the minor items.
• As you walk through, organize the items in your mind as well as on the listing.
• Classify equipment by utility and apparent value.
• Are the items obsolete or seasonal? Do they have future use at the location?
• Is the item important or is it in the pile because no one knows where it is, or has someone saved it because they thought that they may need it someday?
• Was it ordered and dumped because the plant really doesn’t need it now?
• Is it still on the personal property tax schedule?
Often idle equipment is brought from another plant and dumped for lack of a better place to put it. Maybe, the appraiser is the only reliable organizer because of fresh eyes or curiosity that wants answers. If we don’t know we ask. The example below was found in the corner of a hanger plant.
This Hanger/Cape machine, inherited from another plant, was buried behind boxes and work-in-progress. It has a limited market, and is of no use to the present location, but still has market value.
The above machine was placed on the manufacturing floor, but abandoned in place and hidden. In the same plant, I squeezed between, or walked from the tops of the equipment over machine tools, hanger wire formers and unrelated machinery. The inherited machines were shoved into a corner of the plant.
I listed the most marketable machine tools, lumped old an incomplete machines and made a note that the remainder had little or scrap value. I asked the people in charge before I discarded what I thought were cripples. Some of the nastiest looking equipment may have further use.
In appraisals of multiples in the bone-yard and castaways, it isn’t practical to value each piece by the cost, market, and income approach. The fees and expenses don’t warrant an estimate of each as in-place-in-use value, and estimating the economic life and cost-to-cure.
However, if the equipment is seasonable, i.e. canneries, fisheries, holiday specialties, sewing equipment, weather related equipment, it may have been shoved into a corner because there is no other place to put it. Appraisers still have to find such items and list them.
Pick out the machine in the picture below that has real value -- it’s not the old wash machine or the hose crimp in the background. (photo not available)
Foreground: 25LB “New Little Giant” Forging Hammer probably made about 1912 as an “improved” version with a wrap around hammer guard.
The “New Little Giant” forging hammer above looks like a display from a Smithsonian Museum, and it could be. Some of these machines, still in use, are over 100 years old. A blacksmith or metal artist can buy parts for the machine, and there are people in the blacksmith’s trade that rebuild and sell these machines. The one pictured has a market at $1500 in its present condition. Rebuilt 25LB trip hammers sell in the $5000 range. They have a mystique and an intrinsic value.
When I first saw the “New Little Giant” I was tempted to write it off as scrap. However, I found the name, and through the internet I found a community of trip-hammer users. For this appraisal the trip-hammer was a minor item, abandoned in the old forge shop. The owner forgot about it but remembered that someone had made an offer of $850 for the hammer a few months before the appraisal.
Past assignments have asked me to find and appraise industrial artifacts; old things that someone thinks have value. Clutters of foundry patterns are one example of what the manufacturer or a museum sees as valuable, when the market sees them differently.
Wednesday, April 16, 2008
Value-In-Use; Value-In-Exchange
The Practicality of Value-In-Use and Value-in-Exchange.
A visual and cognitive example of value-in-use is equipment installed in a manufacturing plant, and operating. Conversely, for value-in-exchange, what could the same item sell for removed from the installation; compared to other like and kind items?
Value-In-Use:
For value-in-use consider a dust collector, installed in southeastern U.S. pipe plant.
Estimated 1200 SF Area.
The dust collector is part of a working plant. For value-in-use, beyond the original cost of the unit there is added value for the freight, taxes and installation cost, including the ducting, drives, electrics and controls.
The considerations of value-in-use are: Physical Condition, Functional Obsolescence and Economic Life.
Given the location in an aggressive environment, the paint is worn from the collector. The heat through the system; the weather and the plant atmosphere have also eroded the galvanized duct work.
The dust collector has been installed and in use for fifteen-years. The structure shows serious physical depreciation. Again, the factors of depreciated value are:
· Obvious physical wear and tear. Judging from the exterior, what could the interior be like?
· Functional and environmental: Is the collector still up to standards or is it leaking into the atmosphere?
· Is the item still mechanically functional?
· What is the physical life of such a unit in such a place? For a valuation would we consider any published life expectancy guidelines? Is the reported physical condition based on the appraiser’s experience of having seen similar units? Should the appraiser ask the manufacturer or another expert about expectant life of such a collector?
· Functionally, is the collector 100% or has a new technology replaced any part of the unit? For this example, does the collector still use socks or another type of filter media? Are the drive and controls energy efficient?
· Economically, does it cost more to operate the collector than current models? Does the collector require constant maintenance?
For this example, the plant is still operational and the owners want to know Fair Market Value-In-Use. An appraiser will consider the replacement cost new (RCN) including the value added transportation and installation costs, less depreciation from all causes.
Therefore, assume the following hypothetical information. The numbers are examples and are not exact.
1. The equipment was purchased new fifteen-years ago, at a historical cost of: $18,500. The square foot of filter area is approximately 1200 SQ. FT. This is $15.42 per square foot.
2. The current trended reproduction cost from historical book value is $18,500 trended to a current $22,000 or $18.33 per square foot.
3. The manufacturer’s price for an updated unit is $25,000, or $20.83 per sq. ft. The newly manufactured unit will probably have some upgrades. For this example the trended number and the manufacturer’s new price average $22,000+$25,000/2 = $23,500. This is a combination of trended historical and current cost. This averages to $19.58 per square foot, which may account for some technical difference between the old and new technology. Or the appraiser can use the trended reproduction cost or replacement cost new only depending on the purpose of the appraisal.
4. Add current freight, taxes, electrical and ducting. For purposes of this example I’ve added 30% of cost, $7050 or a total installed cost of $30,550. Realistically the added value costs could increase greatly because of location, material and labor costs.
For booking purposes the company may have capitalized the entire installation or maybe expensed the installation cost. This is important to know if the appraiser intends to trend historical cost. For this example, the dust collector was written-off five years earlier and has zero book value. This has nothing to do with actual market value.
For Value-In-Use, how does an appraiser estimate life and depreciation? Possibly, the inspection or a recognized “life expectancy table” may influence the appraiser’s opinion that, on the date of the appraisal, the installed unit has ten-years of life remaining. For the example, I have given the installation a twenty-five year life and the current replacement cost total is $30,550.
At current RCN including value added costs or $30,550, depreciated by fifteen-years, or $30,550/25 = $1222 per year or $30,550 - $18,333. Then, is the Value-In-Use or Cost Less Depreciation value $12,217?
It is helpful to think of equipment by measured capacity or volume. That is units of measure, i.e. square foot of surface, cubic ft., horse power, BTU or hourly capacity. Using the example above, $12,217/1200 sq. ft. area = $10.18 per Sq. Ft., installed. We can use capacity costs over a range of sizes to extrapolate both cost and value. This is useful later when we compare Value-In-Use against Value-In-Exchange.
The appraiser wants to consider for value-in-exchange if the used equipment will be installed. The above example is $10.18 installed. There is a value added cost of 30% or $3.05 per sq. ft. for installation. Value-in-exchange may be $10.18 - $3.05 per sq. ft. or $7.13 per sq. ft.
Keep in mind that it may cost as much to install a used piece, maybe more, as it will cost to install a new item. It is also helpful to understand that in the past, the economy of scale is that cost per square foot comes down as the overall size increases.
Value-In-Exchange:
Continuing to use the example above of 1200sq. ft. x $10.18 - $3.05 = $7.13 or $8532.00. Is the value-in-exchange $8532.00?
What is value-in-exchange but the market value? What would a knowledgeable buyer buy the collector for and what would a knowledgeable seller sell the used collector for in an open market?
Here are some considerations when a knowledgeable buyer wants this dust collector:
What is the apparent physical condition of the collector?
Does the collector meet the expected capacity?
Does the collector meet EPA standards?
Does the collector need refurbishing and new filter media?
Will the buyer want to install new ducting and controls?
What is the cost of removal or will the plant remove the collector and lift onto the buyer’s conveyance?
How far will the collector have to travel? This is a large collector. Are special travel permits needed?
What will it cost to install at the new location?
Is the buyer a speculator thinking they could resell this item to their customer? Therefore, there is no consideration for new ducting or controls unless the seller is also the installer.
10.Will the buyer have to pay sales taxes on this used collector? This will depend on if the buyer is in-state or out of state and the selling states tax laws.
What if this size and type of dust collector were available somewhere else from a dealer?
Consider this:
1. A dealer has already thought like the end user when they acquired the dust collector. In today’s volatile and questionable markets, the collector was possibly a consignment or a residual from a complete deal.
2. Will the dealer or seller have to repaint or repair the dust collector to make it marketable?
3. Will the dealer or seller offer the collector “as is?”
Whatever the seller of the used equipment decides it all has to do with what they think that the market will tolerate. Here is the economic consideration of supply and demand at work.
For this example assume that manufacturing is viable and that there is a market for a used dust collector this type and size.
It is easy enough to find dust collectors but not always the exact capacity. This is one reason we consider units of measure on some manufacturing and process equipment. A valuation is a group of comparisons and averages influenced by condition, location and demand.
For this example I’ll use a recent market offering from a used machinery dealer.
Dust Collector by Schick, 1200 SF, 10 HP Blower, Cone Bottom.
Location: Southern CA.
Dealers will know that the replacement cost for our example is $18,000 to $22,000 with no value added costs or accessories.
If there is a potential market for the used dust collector, and the equipment is in salable condition, expect to see the asking price about 35% to 50% of the replacement price or in the range of $6300 to $10,000 – or higher if the collector is late model and very good condition. There is no consideration here for what the speculator paid for the used collector and their handling costs. Also, is a used collector with old technology? Maybe the seller is open to offers. Is this in line with Value-In-Use less the installation costs?
The used equipment dealer quotes $6,750 for the collector. It is in the sq. ft. range of the first example at $5.63 per sq. ft. For example only, this is in the 30%+ range on the replacement cost new.
The reality is that one sale doesn’t make a comparable market example. However, for this demonstration I chose only one comp. Normally the appraiser will check a range of comps.
Because the collectors in the examples are sock type, there could be some discounting because popular filter media today may be a replaceable cartridge or another collection system.
In comparing the used equipment installed and similar used equipment on the market at the time of the appraisal the estimated value in place may be low or it could be very reasonable. Because a knowledgeable buyer may negotiate the dealer’s asking price or ask for other non-monetary but other value added considerations.
Therefore, the example may demonstrate why appraisal is still an art, an opinion based on fact; not a science. Also, to reiterate, a number of offers and sales may compare or extrapolate completely different range of numbers.
The numbers I put in for examples are not correct, but, guesstimates based on past sales and appraisal experience. In a real assignment the appraiser should check with manufacturers and equipment dealers.
A visual and cognitive example of value-in-use is equipment installed in a manufacturing plant, and operating. Conversely, for value-in-exchange, what could the same item sell for removed from the installation; compared to other like and kind items?
Value-In-Use:
For value-in-use consider a dust collector, installed in southeastern U.S. pipe plant.
Estimated 1200 SF Area.
The dust collector is part of a working plant. For value-in-use, beyond the original cost of the unit there is added value for the freight, taxes and installation cost, including the ducting, drives, electrics and controls.
The considerations of value-in-use are: Physical Condition, Functional Obsolescence and Economic Life.
Given the location in an aggressive environment, the paint is worn from the collector. The heat through the system; the weather and the plant atmosphere have also eroded the galvanized duct work.
The dust collector has been installed and in use for fifteen-years. The structure shows serious physical depreciation. Again, the factors of depreciated value are:
· Obvious physical wear and tear. Judging from the exterior, what could the interior be like?
· Functional and environmental: Is the collector still up to standards or is it leaking into the atmosphere?
· Is the item still mechanically functional?
· What is the physical life of such a unit in such a place? For a valuation would we consider any published life expectancy guidelines? Is the reported physical condition based on the appraiser’s experience of having seen similar units? Should the appraiser ask the manufacturer or another expert about expectant life of such a collector?
· Functionally, is the collector 100% or has a new technology replaced any part of the unit? For this example, does the collector still use socks or another type of filter media? Are the drive and controls energy efficient?
· Economically, does it cost more to operate the collector than current models? Does the collector require constant maintenance?
For this example, the plant is still operational and the owners want to know Fair Market Value-In-Use. An appraiser will consider the replacement cost new (RCN) including the value added transportation and installation costs, less depreciation from all causes.
Therefore, assume the following hypothetical information. The numbers are examples and are not exact.
1. The equipment was purchased new fifteen-years ago, at a historical cost of: $18,500. The square foot of filter area is approximately 1200 SQ. FT. This is $15.42 per square foot.
2. The current trended reproduction cost from historical book value is $18,500 trended to a current $22,000 or $18.33 per square foot.
3. The manufacturer’s price for an updated unit is $25,000, or $20.83 per sq. ft. The newly manufactured unit will probably have some upgrades. For this example the trended number and the manufacturer’s new price average $22,000+$25,000/2 = $23,500. This is a combination of trended historical and current cost. This averages to $19.58 per square foot, which may account for some technical difference between the old and new technology. Or the appraiser can use the trended reproduction cost or replacement cost new only depending on the purpose of the appraisal.
4. Add current freight, taxes, electrical and ducting. For purposes of this example I’ve added 30% of cost, $7050 or a total installed cost of $30,550. Realistically the added value costs could increase greatly because of location, material and labor costs.
For booking purposes the company may have capitalized the entire installation or maybe expensed the installation cost. This is important to know if the appraiser intends to trend historical cost. For this example, the dust collector was written-off five years earlier and has zero book value. This has nothing to do with actual market value.
For Value-In-Use, how does an appraiser estimate life and depreciation? Possibly, the inspection or a recognized “life expectancy table” may influence the appraiser’s opinion that, on the date of the appraisal, the installed unit has ten-years of life remaining. For the example, I have given the installation a twenty-five year life and the current replacement cost total is $30,550.
At current RCN including value added costs or $30,550, depreciated by fifteen-years, or $30,550/25 = $1222 per year or $30,550 - $18,333. Then, is the Value-In-Use or Cost Less Depreciation value $12,217?
It is helpful to think of equipment by measured capacity or volume. That is units of measure, i.e. square foot of surface, cubic ft., horse power, BTU or hourly capacity. Using the example above, $12,217/1200 sq. ft. area = $10.18 per Sq. Ft., installed. We can use capacity costs over a range of sizes to extrapolate both cost and value. This is useful later when we compare Value-In-Use against Value-In-Exchange.
The appraiser wants to consider for value-in-exchange if the used equipment will be installed. The above example is $10.18 installed. There is a value added cost of 30% or $3.05 per sq. ft. for installation. Value-in-exchange may be $10.18 - $3.05 per sq. ft. or $7.13 per sq. ft.
Keep in mind that it may cost as much to install a used piece, maybe more, as it will cost to install a new item. It is also helpful to understand that in the past, the economy of scale is that cost per square foot comes down as the overall size increases.
Value-In-Exchange:
Continuing to use the example above of 1200sq. ft. x $10.18 - $3.05 = $7.13 or $8532.00. Is the value-in-exchange $8532.00?
What is value-in-exchange but the market value? What would a knowledgeable buyer buy the collector for and what would a knowledgeable seller sell the used collector for in an open market?
Here are some considerations when a knowledgeable buyer wants this dust collector:
What is the apparent physical condition of the collector?
Does the collector meet the expected capacity?
Does the collector meet EPA standards?
Does the collector need refurbishing and new filter media?
Will the buyer want to install new ducting and controls?
What is the cost of removal or will the plant remove the collector and lift onto the buyer’s conveyance?
How far will the collector have to travel? This is a large collector. Are special travel permits needed?
What will it cost to install at the new location?
Is the buyer a speculator thinking they could resell this item to their customer? Therefore, there is no consideration for new ducting or controls unless the seller is also the installer.
10.Will the buyer have to pay sales taxes on this used collector? This will depend on if the buyer is in-state or out of state and the selling states tax laws.
What if this size and type of dust collector were available somewhere else from a dealer?
Consider this:
1. A dealer has already thought like the end user when they acquired the dust collector. In today’s volatile and questionable markets, the collector was possibly a consignment or a residual from a complete deal.
2. Will the dealer or seller have to repaint or repair the dust collector to make it marketable?
3. Will the dealer or seller offer the collector “as is?”
Whatever the seller of the used equipment decides it all has to do with what they think that the market will tolerate. Here is the economic consideration of supply and demand at work.
For this example assume that manufacturing is viable and that there is a market for a used dust collector this type and size.
It is easy enough to find dust collectors but not always the exact capacity. This is one reason we consider units of measure on some manufacturing and process equipment. A valuation is a group of comparisons and averages influenced by condition, location and demand.
For this example I’ll use a recent market offering from a used machinery dealer.
Dust Collector by Schick, 1200 SF, 10 HP Blower, Cone Bottom.
Location: Southern CA.
Dealers will know that the replacement cost for our example is $18,000 to $22,000 with no value added costs or accessories.
If there is a potential market for the used dust collector, and the equipment is in salable condition, expect to see the asking price about 35% to 50% of the replacement price or in the range of $6300 to $10,000 – or higher if the collector is late model and very good condition. There is no consideration here for what the speculator paid for the used collector and their handling costs. Also, is a used collector with old technology? Maybe the seller is open to offers. Is this in line with Value-In-Use less the installation costs?
The used equipment dealer quotes $6,750 for the collector. It is in the sq. ft. range of the first example at $5.63 per sq. ft. For example only, this is in the 30%+ range on the replacement cost new.
The reality is that one sale doesn’t make a comparable market example. However, for this demonstration I chose only one comp. Normally the appraiser will check a range of comps.
Because the collectors in the examples are sock type, there could be some discounting because popular filter media today may be a replaceable cartridge or another collection system.
In comparing the used equipment installed and similar used equipment on the market at the time of the appraisal the estimated value in place may be low or it could be very reasonable. Because a knowledgeable buyer may negotiate the dealer’s asking price or ask for other non-monetary but other value added considerations.
Therefore, the example may demonstrate why appraisal is still an art, an opinion based on fact; not a science. Also, to reiterate, a number of offers and sales may compare or extrapolate completely different range of numbers.
The numbers I put in for examples are not correct, but, guesstimates based on past sales and appraisal experience. In a real assignment the appraiser should check with manufacturers and equipment dealers.
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