How Did You Get There?

The Problem

Appraisers are not always great at explaining valuations in their reports.

You can pick any field – real estate, machinery and equipment, business valuation, or arts and antiques – and you will find many appraisal reports which have little or no explanation of how the appraiser arrived at the value opinions.

Don’t get me wrong, you will find all kinds of support: comp tables, adjustment scales, formulas, industry insights, and even some brightly colored charts.

Unfortunately, these often do as much to obfuscate as to explain. But dang they look good when you scroll over them on the way to the Totals page!

What are We Hiding?

I can only speak about the machinery and equipment (M&E) appraisal industry. I can tell you that most M&E appraisers, in particular ASA and AMEA members, are not trying to hide anything – we are competent professionals who have confidence in our values.

Rather, my sense is that we are trying to avoid openly acknowledging the fact that M&E 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. 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, 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), 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?

I sense that M&E appraisers often feel pressured to communicate common sense arguments through statistics. We try to turn the intuitive into the mathematical.

This is not practical; in fact it’s nonsensical. It is why many M&E appraisers – including myself – have at times turned in poor reports even when we have developed quality valuations.

In-Place and Removed Examples

Let’s say I’m appraising a print shop with a large Heidelberg offset press.

- If I am appraising in-place (say, for purchase price allocation), then I will value the press based on how much it would cost to purchase and install a new comparable press, minus deductions for age, condition, impression count, upgrades needed, technological deficiencies, and so on.

This process can be made to look very “numbers-based,” but in reality the adjustments are wholly interpretive.

There are not enough used Heidelberg presses sold in a year to develop a mathematical correlation for value loss per impression. There is no weekly Heidelberg press auction where 25 similar units are run across the block, which could give indications of proper adjustments for age and condition.

The best I can likely do is gather some manufacturer estimates of expected life, expected impression count, costs of maintenance and upgrades, efficiency differences between used and new presses, and current costs of a new machine and installation.

These will be numbers – but they will be estimates, nothing more than rough data points. I can format a nice chart in Excel, but it will be misleading if it indicates that there are large market data sets behind the results.

The result is based on and supported by numbers, but it remains a largely intuitive decision.

- If I am appraising for removal (say, for collateral financing), then I will look for recent transactions of similar presses.

I know before I start that there won’t be enough good comps. I might find a few of the same model, a few similar in age or condition, and a few with a similar range of impression counts – but I probably won't find any with all four factors.

So, I will broadly bracket in the value based on the asking and selling prices for the kind-of comparable sales and sort-of similar offerings on the market. I will roughly adjust the prices based on how long the listing has been active and whether the sale was retail or auction. I will find out the price of a new press to gauge the reasonableness of my used press value estimate.

This is an interpretive process. There are not enough data points, and the data comes from too many dissimilar sources, to develop any sort of statistical analysis.

I may end up with a “reasonable” value opinion window of 20% or more. (A typical note in my workfile says, “Market shows $650-$800. Called dealer John Doe, he says that’s about right.”)

I will end up picking a number somewhere in that range based on how the press looks and how I feel about the press market, the company, and the assignment. There isn’t any math involved. I couldn’t format a misleading chart in Excel even if I wanted to.

Well Why Didn’t You Just Say So?

I have turned in many reports with colorful charts and impressive comp tables. But when the client calls, here’s the conversation:

Client: “Your value is too low. I read the report. That’s great and all, but I have almost $2.3 million in that press.”

Me: “I understand. However, your press is getting old and needs upgrades – you admitted as much yourself. Two presses in better condition sold last year for $800 and $850. There’s a similar press listed right now for $750, and it’s been up for over five months. Heidelberg quoted me a brand new one for $1.8 with a 3-year service contract and free upgrades. I put yours at $675. I admit it could be more or less, but that’s a reasonable estimate. I ran it by a used dealer and he agreed that was within the reasonable range.”

That’s it? Well, that makes a lot more sense than the charts and tables. Why didn’t I 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. Reports are the only thing the rest of the world sees! Reporting is just as, if not more important, than valuation.

That might sound like a stupid thing to say, 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. The ASA and AMEA both have resources to help with report writing, but I have perceived it to be a secondary focus after valuation process (ASA), market knowledge (AMEA), and USPAP (both).

I would suggest that more M&E appraisers begin to consider report writing – including statistical presentation, narrative / argumentative writing, and written valuation defense – as a core tenet of their practices. It is a competency toward which we should be continuously educating ourselves, as we do with the three competencies mentioned above.

Report Writing Resources (besides USPAP) I’m Using in 2020

Report writing samples for AMEA members

These are solid report building blocks. Don’t fall to the temptation to C&P the samples! Writing something original and a bit rough is better than copying something smooth which doesn’t really fit the situation or the rest of the report.

ASA Report Writing course (ME212)

The name says it all. I have never taken this course, but intend to do so this fall.

ASA Valuing Machinery and Equipment textbook

There is a chapter on report writing which lays out all of the basics and gives some samples. It also has super-helpful reporting content and USPAP checklists. Every M&E appraiser should have this book on their (digital or actual) desktop.

2020 ASA International Conference – MTS Session “Modeling…Beyond the Math”

The blurb for this session indicates that it will help me use real market inputs in my valuation models, which I assume will help me explain those models better to clients. Also, it’s the first session on Monday (sorry Sunrise Yoga, maybe next year!) so it has to be good.

Tim Roy, ASA, Senior M&E Appraiser

Capitale Analytics

[email protected]