Costly risks for machinery and equipment desktop appraisals
This article will discuss desktop appraisal risks and extra costs for machinery and equipment appraisals and inventory valuations. Desktop appraisals for inventory, machinery, and equipment do not always cost less than an appraisal with inspection because of the additional steps the appraiser must take to develop a credible valuation.
How a desktop appraisal can cost you more
In some cases, the client’s time frame does not allow for an inspection to be performed. If that is the situation, the client should already have a detailed asset list readily available for the appraiser to immediately begin research. As an alternative, ordering an appraisal with inspection may actual be more expedient for meeting deadlines.
Contrary to what is often assumed, desktop appraisals are not always faster or more economical than ordering an inspection appraisal. Often times, the back-and-forth data collection communications between appraiser and asset owner take far longer than an appraiser’s actual inspection and travel time. Property owners are often unaware of the level of detail and type of data required by an
appraiser for a proper analysis. In contrast, the appraiser is already experienced in collecting the asset data that will be important for properly valuing the assets. A picture is worth a thousand words, but seeing the asset firsthand reduces the Q&A session and minimizes turnaround time.
When you talk about cost, you naturally have to consider the cost of a bad business decision. Desktop appraisals can put the client at risk for possible fraud or misrepresentation by the party providing the asset information to the appraiser. Clients should consider the trustworthiness and motives of other parties with access to the data and to the appraiser.
Potential risks associated with desktop appraisals
Desktops appraisals are often performed by relying upon data provided by the client, property owner, or other parties. Without third-party verification, such as an asset inspection performed by an appraisal company, the following are potential outcomes:
Insufficient Details
When the asset information provided to the appraiser lacks sufficient data, the appraiser has to make assumptions for the missing data in order to complete the valuation. Even though making the assumption may not take very much time (for example, making the assumption that the pickup truck has average mileage for its age), the documentation required to meet USPAP reporting requirements of those assumptions adds to the appraiser’s report writing time.
As another example, certain modifications to machinery or equipment cannot be decoded by a title, VIN, or serial number. So even when photographs are provided, alterations and accessory equipment can be overlooked if these specifications are not clearly reported to the appraiser.
Inventory valuations are difficult to perform without a site visit, since a test count for variance is a standard step in determining the accuracy of the perpetual inventory report. Even more so, the perpetual report rarely has sufficient line items descriptions, so the inventory appraiser is disadvantaged by not having the ability to see the inventory assets in person.
Inaccurate Listings
Erroneous or outdated information on the asset listing may or may not be intentional. A company’s asset listing can change significantly over time. Other departments within a company will often purchase, replace, and dispose of assets without notifying the accounting department. Items can go missing or be stolen without the company’s knowledge. Disposals and movement of property can easily lead to duplicate listings and quantity variances. If the property owner has not recently reconciled the list of reported assets to the actual assets currently on site, the actual owned assets could be significantly different than expected.
Physical Condition Discrepancies
In a desktop appraisal, the appraiser relies upon photos (if provided) and the physical condition as reported by the client, the owner, or another party. The subject property’s true condition can be misrepresented to the appraiser to skew the valuation in that party’s favor. Conversely, in an inspection appraisal, the appraiser looks for physical condition and property damage. Also, the appraiser may notice and report storage condition issues or improper use of an asset.
Assumptions to meet compliance
In order for the appraisal to comply with the Uniform Standards of Professional Appraisal Practice (USPAP), the appraiser must ensure that the resulting valuation is not false or misleading. Therefore, whenever sufficient asset details are not available to arrive at credible values for the subject property, the appraiser must make assumptions for the missing data in order to complete the valuation process. The reliability of valuations based on assumptions diminishes as additional assumptions are added that are not truly reflective of the subject property.
When in doubt, get the inspection!
While desktop appraisals can arrive at credible determinations of value, an inspection provides a more defendable valuation since a third-party is involved in the verification process. And chances are…you’ll get the appraisal faster and for less! Read more about what is revealed in a machinery and equipment or inventory appraisal.
Besides, you’re already hiring an appraisal expert – why not get the benefit of their expertise? An accredited, or accredited, equipment appraiser can reduce the burden on all parties involved by collecting the necessary data with little to no assistance from the client or equipment owner – all while providing a finalized report with far less deviations from factual data for assumptions. The process is faster, and therefore, often costs less than a desktop appraisal.
About the Author
Tammy Blackburn, ASA is Accredited Senior Appraiser with over 15 years of experience performing Machinery & Equipment appraisals and Inventory valuations. As an expert witness, Ms. Blackburn has defended her appraisals in Federal bankruptcy court and in Value Adjustment Board hearings. Having served 7 years as a Special Magistrate in 10 counties for ad valorem Tangible Personal Property, Ms. Blackburn is uniquely qualified to perform appraisals to be used for establishing taxable value.
