I began my career as an appraiser 20 years ago before transitioning to personal property appraisals—specializing in the value of deconstructed materials. With both types of appraisals, similar questions must be asked and answered throughout the appraisal development and reporting process. Both real estate and personal property appraisals should (and must in most cases) follow the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP provides the following five rules, which apply to both real and personal property disciplines:
- 1IEthics Rule
- 2Record Keeping Rule
- 3Competency Rule
- 4Scope of Work Rule
- 5Jurisdictional Exception Rule
USPAP Standards are broken out between real property (Standard 1 and 2) and personal property (rule 7 and 8). Both types of appraisals include “Problem Identification,” addressing the following:
- 1Identify the client and other intended users
- 2Identify the intended use of the appraiser’s opinions and conclusions
- 3Identify the type and definition of value
- 4Identify the effective date of the appraiser’s opinions and conclusions
- 5Identify from sources the appraiser reasonably believes to be reliable, the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal
- 6Identify any extraordinary assumptions
- 7Identify any hypothetical conditions necessary
- 8Determine the scope of work necessary to produce credible assignment results
The differences in moving from real to personal property manifested in how the eight above-listed questions are answered. The clients for real estate appraisals are typically individuals looking to buy or sell real estate or open lines of credit with the underlying real property acting as collateral. Deconstruction appraisal clients are typically donating used building materials, furnishings and fixtures to charity and the appraisal is used to substantiate income tax deductions.
The type and definition of value highlights the marked difference between “market value” and “fair market value.” Both real estate and deconstruction (personal property) appraisals predominantly use the Sales Comparison Approach, which includes researching consummated sales during a relevant time, within the appropriate market, and using those values to opine the value of the appraised property. However, for tax deductions, fair market value supposes a hypothetical sale taking place when determining value whereas market value assumes a sale will definitely take place. Both definitions require the value analysis to include a willing, fully informed and arm’s length buyer and seller.
Learning to properly value deconstructed materials posed challenges to me early in my career. Classes are not offered in deconstruction appraisals from any of the three largest personal property appraisal organizations: Appraisers Association of America, American Society of Appraisers, or International Society of Appraisers. My body of knowledge has included the extensive study and research of second-hand building materials, home furnishings, and fixtures by reviewing sales offered online, speaking with non-profit and for-profit reuse yards, and analyzing price trends regionally.
What has added additional confusion has been the occurrence of some deconstruction appraisals being produced using real estate values. Essentially, these appraisers are valuing the pre-deconstructed building as the value of the total real estate less land value, which equals improvement value. This theory values the building as if it is being left intact and moved to a new location. While we have seen the rare home lifted from the foundation and relocated to a new lot, the majority of deconstructions involve the careful dismantling of the structure to maximize the amount of materials that can be salvaged for reuse or recycling.
The long held legal definition of constructive severance is the conversion of real property to personal property at the moment of removal from the real property structure. Deconstruction appraisals are personal property appraisals. The value of the severed personal property rarely equates with the real estate value of the structure when it was intact real property. Taxpayers must be protected from deconstruction appraisers that assign real property improvement value. Let us consider a simple example:
A 4,500 square foot home in Vienna, VA has land value of $300,000 and improvement value of $500,000. After deconstruction, approximately $100,000 of deconstructed materials were salvaged and donated. If the taxpayer had a real estate appraisal produced, using the $500,000 value, and they had a federal effective tax rate of 25% and a state tax rate of 5%, they would realize a tax savings of $150,000. If the appraisal were valued correctly at $100,000, they would realize a tax savings of $25,000.
Without a sound knowledge of proper valuation, the taxpayer could face audit, disallowance and a 40% penalty as the valuation would be 400% over valued. These penalties and loss of deduction fall squarely on the taxpayer, not the appraiser.
In order to accurately value deconstructed materials, the appraiser must look at the second-hand building materials market. This is where the value for these materials can be found. Just like the real estate appraiser must determine the correct geographic sales market area, the personal property appraiser must determine the correct sources from which they gather comparable sales data.
Like mentioned above, the Sales Comparison Approach to value should be used predominantly when valuing building materials. Some appraisers use the Cost Approach to value, where they find the value of new materials and apply depreciation to arrive at value. The Cost Approach is the predominant approach to value for insurance appraisals—when the replacement value is requisite for replacing property, should there be a claim. Quite a few deconstruction appraisers use Construction Cost Estimating software like R.S. Means or Marshall & Swift to plug structural details and quality specifications into the software, apply some depreciation and use the calculated value as appraised value. Not only does the value calculated from the software not align with valuations opined through use of the proper Sales Comparison Approach, but an appraisal that would take 40-80 hours of combined office time in research and reporting, takes about 15-60 minutes using the software short-cut. Again, it is the taxpayer left holding the bag should they come under audit and the IRS disallows the deduction and assesses underpayment fines and penalties.
Please reach out to me with questions regarding The Green Mission Inc. and our processes to get started with a project.
