Thursday, July 16, 2020 in Education
Have you ever wondered when it's appropriate to use value-in-use or value-in-place? These terms can be a bit confusing, as they relate to internal relevant characteristics or forces that affect value. While most appraisers don't encounter many situations where these values come into play, it's essential to have a good understanding of their uses to recognize their need when the opportunity arises.
In our appraisal practice, we occasionally write reports or perform verbal appraisals where value-in-use or value-in-place are appropriate. When addressing a loss, these appraisals often make use of the Broad Evidence Rule or the McAnarney Rule. This rule states that there are no fixed guidelines for determining the amount of recovery in case of loss, allowing the appraiser to consider all aspects of value, including non-traditional factors such as sentimental value to the owner. By carefully considering all relevant evidence, a correct assessment of a property's owner value can be made.
According to the ISA Core Course manual, value-in-use, commonly known as "owner value," is defined as the value of property taking into consideration the extent to which it contributes to the personal needs, satisfactions, or requirements of the owner. This value can greatly exceed market value, depending on the owner's personal feelings, such as sentimentality. While appraisers are taught to leave sentimental value out of their appraisals, value-in-use allows us to consider it. However, finding comparables that include sentimental value can be challenging, as they rarely exist. In such cases, a different approach must be taken. Although sentimentality may not have a measurable value, a premium can be proposed using value-in-use to support value conclusions.
Let's consider a real-life case to illustrate this point. The widowed father of adult children remarried but predeceased his new wife. The wife broke her promise to return certain items of personal property to the children, leading to a lawsuit. The children sued for the value of the property, which they cherished. Most of these items had little worth outside of the family, including WWII military medals, a burial flag, a commemorative handgun, amateur oil paintings, and framed photographs. Comparable sales data for these items was found in the secondary market, such as eBay. The children presented an inventory to the court with sentimental values exceeding $200,000. On the other hand, the wife's appraiser provided a replacement cost slightly above $11,000 and a fair market value just under $3,000. By using value-in-use, my replacement cost appraisal totaled approximately $22,000, and the fair market value amounted to about $8,000. Despite not reaching the children's stated value, a case was made that the loss of these family heirlooms created a hardship for the heirs and that value-in-use was appropriate to consider.
Value-in-place is a specific type of value-in-use. It is the value of property considering the extent to which it contributes to the success of a business. With value-in-place, there is a recognition of a premium in value over the property's value if it were not "in place" and making a contribution. This value is easier to determine as concrete costs like delivery and equipment installation can be added to the value basis.
For instance, consider a law practice losing one of its partners. The partner will be compensated for their share of the business's value as the other partners buy out their share. A business valuator will appraise the intangible assets of the business, while a personal property appraiser will assess the tangible property like computers, office equipment, furniture, and artwork. The equipment already being installed and operational adds value to the business beyond its fair market value.
Another application for value-in-place is when a homeowner sells their house furnished. Sellers often need to know the value of the furnishings offered to prospective buyers, separate from the real estate. By starting with the market value and adding a premium for the furniture being "in place," appraisers can determine the value. The furniture complements the décor, creating added value for the buyer in terms of convenience and cost savings.
These are just a few examples of how value-in-use and value-in-place can impact an appraisal assignment. While they may not be used frequently in your practice, they are important components of value that should be considered. Ignoring value-in-use or value-in-place could lead to an inaccurate valuation and a disservice to your client.
By Diane P. Marvin, ISA CAPP
