Explain yourself
We may be biased, but appraisers are pretty great at determining valuations for the reports they generate for clients. When it comes to explaining those valuations? That can be an entirely different story, unfortunately.
Pick any appraisal field – real estate, machinery and equipment, business valuation, arts and antiques, etc. – and you will find many appraisal reports which have little or no explanation of how the appraiser arrived at their value determination.
This isn’t the same as saying there won’t be support for the valuation – tables, adjustment scales, formulas, industry insights, and even some brightly colored charts. It’s just that these may not help in explaining valuation as much as appraisers can think they do. (Indeed, even though they look good and add heft to the final report, these often do as much to obfuscate as to explain.)
This raises an obvious question – why? Allow us to explain…
Speaking only for the machinery and equipment (M&E) appraisal industry, most M&E appraisers – in particular ASA and AMEA members – are not trying to hide anything. Rather we are competent professionals who have confidence in our values. Instead, the most likely explanation is M&E appraisers are trying to avoid openly acknowledging the fact that this specific area of appraisal is rarely based solely on quantifiable data.
The Intuitive and the Mathematical
M&E appraisers know that “look and feel” are often key factors in our appraisals; at the same time, however, our reports are often being reviewed by “numbers” people such as credit analysts and auditors. These reviewers understand that appraisals are opinions, but they often seem to prefer that those opinions are developed through statistical analysis of large data sets.
Unfortunately, those types of large data sets only exist for a few specific types of M&E. In cases where market transaction data is limited (which is most cases, to be honest), the M&E appraiser faces a quandary:
Should I explain the common-sense support for my valuation, admitting that there was little or no statistical analysis involved?
Or, should I "math it up" a little and present my support as being more based on statistical analysis than it really is?
Again, our sense is that M&E appraisers often feel pressured to communicate what they know to be common-sense arguments (based on extensive experience) through statistics. In doing so, we are working to turn the intuitive into the mathematical.
This is not practical; in fact, it’s nonsensical! And, it is why many M&E appraisers have at times turned in poor reports, even when we have developed quality valuations.
Well, Why Didn’t You Just Say So?
We’ve turned in many reports with colorful charts and impressive comp tables. But when the client calls, the conversation tends to go something like this:
Client: “Your value is too low in your report. I have almost $2.3 million in that press.”
Us: “We understand. However, your press is getting old and needs upgrades – you admitted as much yourself. Two presses in better condition sold last year for $800K and $850K. There’s a similar press listed right now for $750K, and it’s been up for over five months. A major press manufacturer quoted me a brand new one for $1.8M with a 3-year service contract and free upgrades. Given all this, we put yours at $675K. It could be more or less, but that’s a reasonable estimate. We ran it by a used dealer and he agreed that was within the reasonable range.”
That makes a lot more sense – and does a better job explaining valuation – than the charts and tables, don’t you think. So why not just say that in the report?
Central Competency
Unfortunately, many M&E appraisers see report writing as a formality – it is what’s left after all of the real work is done. This is faulty reasoning. After all, reports are the only thing the rest of the world sees! It is just as, if not more important, than valuation.
That might sound rather counterintuitive, but consider this: an inaccurate valuation can be easily corrected if the client has a good report which explains how the Appraiser developed the valuation. A poor report, on the other hand, hides everything – the client can’t tell whether the valuation was good or bad, or in what ways it was flawed.
Many very good appraisers are not natural writers and may feel uncomfortable trying to communicate “look and feel” valuations to “numbers” people. Our suggestion is for more M&E appraisers to begin to consider report writing. Everyone – including, most importantly, clients – will benefit.