Shannon P. Pratt - Analyzing Complex Appraisals for Business Professionals

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T his book was written to combine many appraisal subjects into one text that could help business professionals better understand how to read and review them. It occurred to Dr. Pratt and me that, to our knowledge, nothing like this book was available, and this was the beginning of our collaboration to write it. The challenge was to determine how much information should be includedif there was too much, then readers might get bogged down and not be able to quickly find the information they were seeking. If it did not include enough, then readers might lack the knowledge necessary to determine the credibility of appraisals that they might encounter in their work as bankers, lawyers, accountants, real estate brokers, and other professionals.

Our hope is that we found the correct middle ground, and those who need more information can consult texts that treat the specific appraisal subject they are reviewing with more depth, and those who need less will be pleased that they can find what they need with a minimal effort because there is not an overload of material. All in all, we hope this book fills a need for those who deal with appraisals in the course of their daily business.

John Lifflander, July 2016

T he basis of most appraisal theory is the concept of substitution. People use this theory in everyday life to some extent, as they are confronted with choices in purchasing various items. In its most basic distillation, they compare the same product or similar products that are offered at different prices. The question that often arises is this one: Can a less expensive product be substituted for a more costly one without a loss in quality?

A generic medicine may be cheaper than its brand-name competitor, but is the substitute for the name brand just as effective, safe, and reliable? Given the choice of various automobiles with similar characteristics, a buyer might wonder if it is worth saving money by buying a less popular brand. Will the cheaper car be as reliable and have the same resale value? Is it worth the risk of buying it to save several thousand dollars? Perhaps without realizing it, people use appraisal principles in their lives on a regular basis.

The appraiser is generally not the buyer, so he or she uses the substitution principle from the perspective of a professional analyst. This means appraisers should not impose their own likes and dislikes and other biases about the property under valuation. Rather, they should, to some extent, put themselves in the position of a buyer, as they seek to determine the value of the subject property. For instance, an appraiser might never even think of buying a house next to the freeway because of the constant noise. Nevertheless, to determine the value of the property, the appraiser must consider other sales with a similarly noisy environment and base the value conclusion on what those properties have sold for. Essentially, the appraiser must play the part of a buyer who doesnt mind the noise and who would be shopping for similar properties.

Likewise, an industrial appraiser may think that a particular paper mill is not a good investment because of various economic factors that suggest that demand for the type of paper that the mill produces is waning and, to add to the difficulty, there is more production coming online in the future. For this reason the appraiser, if acting as a buyer, would never consider purchasing the mill. Nevertheless, that personal view should not influence the appraisers value conclusion. The conclusion should include the knowledge of the industry and consideration of the economic issues for the mill that that appraiser has, but the estimate of value should not be influenced by the appraisers subjectivity.