DID YOU KNOW?
The same item may have several different appraised amounts. For example, the insurance coverage cost of an 18th-century Chippendale chair may be different than its resale value in the current market. Your appraiser will be able to assign the appropriate type of amount after discussing the appraisal’s purpose. The following is a brief overview and examples of valuation terms commonly used.
TYPES OF AMOUNTS
VALUE is the monetary relationship between properties and those who buy, sell, or use those properties. It is often used to describe the amount obtained for an item within a certain context, including market level and timeframe. In everyday language, the word "value" is often used interchangeably with amount or worth.
PRICE is the amount of money asked for an item where a sale is contemplated. It is most commonly used to describe the retail asking amount, which may or may not be realized. Price can also be the amount offered or paid for a property, which can be artificially high.
COST is the amount of money required to create, reproduce, replace or obtain a property. Cost may be equal to value but is not synonymous. Cost is a component considered when developing a specific type of value. Most commonly, cost is considered when estimating Replacement Value.
WORTH is the amount of money equivalent to income generated by the property. In everyday language, worth is more often used interchangeably with value or amount.
FREQUENTLY USED AMOUNTS
Determine Fair Market Value
The price that property would sell in the most common market between a willing seller and a willing buyer in a public sale, neither being under any compulsion to buy or sell and both having reasonable knowledge of all relevant facts. This value type should especially be used in appraisal reports filed with the IRS for donation or estate tax purposes.
Estimate Replacement VALUE
The amount it would cost to replace an item with another of similar or like quality within a reasonable amount of time in the relevant marketplace. This cost type (also sometimes referred to as ‘replacement cost’ or ‘retail value’) is most commonly used for insurance coverage and is often the highest monetary amount for an appraised item.
Calculate Present Worth
The current amount that would be the equivalent of income generated by the sale of property at some point in the future. Present worth is typically employed as part of a larger business valuation.
TYPES OF VALUE
Fair Market Value or FMV is used in all appraisal reports for United States government federal functions such as non-cash charitable contributions for income tax deductions and estate tax. It is also frequently encountered in equitable distribution and family distribution appraisal reports. The formal definition of FMV is defined by the IRS definition as stated in the Treasury Regulation Sections 1.170A-1 (c) (2) is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." FMV is most commonly interpreted as being sourced from auction sold prices. Based on the Technical Advisory Memorandum 9235005 [May 27, 1992], fair market value should include both auction hammer price and buyer's premium.
Market Value or MV is the most probable amount of money a buyer would pay and a seller would receive for an item within an identified market. It is similar to fair market value except for the lack of compulsion to buy or sell is removed.
Replacement Value is the amount it would cost to replace an item with one of similar and like quality purchased in the most appropriate marketplace within a limited amount of time; it also includes additional costs associated with such a replacement such as framing, crating, and transportation. Replacement Value is also defined as the highest price in terms of cash or other precisely revealed terms that would be required to replace a property with another of a similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market.
Net Value or Net is commonly used in equitable distribution proceedings to indicate the property's market value less any encumbrances or expected selling commissions or costs.
Marketable Cash Value or MCV is the net proceeds of a sale (expenses might include advertising, auctioneer/broker’s commission, transportation costs, photography costs, etc.).
Actual Cash Value or ACV is an insurance term usually defined as Retail Replacement Value minus depreciation, or replacement cost less depreciation (depending on your jurisdiction). It is often interchanged with the term market value. Depreciation, in this instance, typically refers to an incremental reduction in value based on age/life formulas commonly used within the insurance industry. The adjuster usually establishes actual cash value.
Liquidation Value is the amount realized in a forced sale within a short time that is lacking adequate advance marketing. Due to the rushed timeline and the limited buyers who would be informed of the sale at short notice, prices are very low. A critical difference between a sale at liquidation value and a sale at fair market value is that the liquidation value sale does not have a willing buyer, but rather one is forced to sell by extenuating circumstances. Liquidation Value is often used in bankruptcy contexts.
Salvage Value is the amount that can probably be obtained from a damaged item or for the components of a damaged item. In particular, Scrap Value a type of salvage value in which the amount would probably be obtained for an item that was being broken up to obtain materials. It recognizes the intrinsic value of materials comprising the item.
Sentimental Value is the non-monetary, emotional satisfaction of an item.
TYPES OF COST
Replacement Cost is an insurance term to describe the cost to replace an item with one similar and like quality purchased in the most appropriate marketplace within a limited amount of time. This can be achieved by production, reproduction, or purchase. Replacement cost is a factor often considered when estimating Replacement Value.
Replacement Cost New is the amount it would cost to replace an item with a new item of like kind, quality, and utility. It considers that items may be upgraded to the latest model or style.
Replacement Cost Comparable is defined as the cost to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market. When applicable, sales and/or import tax, commissions, and/or premiums might be included in this amount. This type of cost is frequently employed for fine art, antiques, or property with significant provenance.
Reproduction Cost is the total amount for constructing a replica by a qualified artist or craftsman, using the same materials and construction techniques as the original.
Historical Cost is the amount of the item when it was first placed in service; it is also known as "base price" in the insurance industry.
TYPE OF WORTH
Present Worth is an accounting term representing the current amount of money that would be the equivalent of income generated by the sale of property at some point in the future or the stream of income generated by leasing property for a specified amount of time.
CONTEXT IS KEY
As exemplified by the valuation terms above, context is key when defining amount. A more accurate conclusion of value, cost, or worth requires knowing the specific circumstances – the who, what, when, where, why of appraising. So what’s it worth? Now you know that the short answer is “it depends.” After reviewing these definitions, you are hopefully more familiar with the vocabulary frequently used when evaluating personal property. This new fluency in appraisal language will be useful when communicating your own valuation needs.
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About the Author: Courtney Ahlstrom Christy is the Principal Appraiser of Ahlstrom Appraisals LLC. She has worked with auction houses, museums, and galleries - all of which have provided unique opportunities to closely examine works ranging from the antique to the contemporary. Her background in the field of decorative arts includes silver, ceramics, glass, and furniture. Courtney also has extensive experience in fine art with a special interest American and European works from the late 19th to early 20th century.
© Courtney Ahlstrom Christy 2020