Ask an Instructor: Replacement Cost

ISA members are invited to send in their questions on all things appraising and education to ISA's instructors. One of ISA's instructors will share answers on the ISA Now Blog. Please send questions to directorofeducation@isa-appraisers.org.


Question: I'm confused as to what to call the insurance value in my appraisal report. Some people call it Replacement Cost, some call it Replacement Value, and some call it Replacement Cost Value. What is the right term that I should be using?

Answer: ISA prefers the term Replacement Cost to be used in insurance appraisals. Why is that? Let's go back to Lesson 1 in the Core Course. Cost is the amount of money paid for an item. Unlike value, cost is not always justified. Just because you paid X amount of dollars for an item, doesn't mean it's worth that much. The monetary worth of an object is its value. Thus, for insurance, when you are estimating the cost to replace an item (either by production, reproduction, or purchase), the correct term to use is Replacement Cost. Other organizations may use the term Replacement Value to mean the same thing as Replacement Cost, but we wish to differentiate ourselves by using the proper words. As for Replacement Cost Value, this term is sometimes used by insurance companies to mean Replacement Cost or Replacement Value, but really it only causes more confusion. Replacement Cost is the most correct term to use.

- Meredith Meuwly, ISA CAPP
Director of Education

Determining Value

Tim Luke, ISA AM, CAI, BAS, MPPA

An essential aspect of our valuation services and specifically in our appraisal practice is determining value. The Uniform Standards of Professional Appraisal Practice (USPAP) provides guidance in the form of a definition of value and a comment as follows, "Value: the monetary relationship between properties and those who buy, sell or use those properties. Comment: Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value. In appraisal practice, value must be qualified - for example, market value, liquidation value, or investment value."

This one definition is brimming with information and guidance in determining value, so let's take a look at the various elements of the definition. Looking at the first part of the definition, it states, "the monetary relationship between properties..." This means comparing the subject property with comparable items of like kind and quality. It is important to remember when comparing the subject property with comparable items, consideration of all physical characteristics and overall condition must be taken into account to establish a good relationship between the properties. This correlation between the various comparable items with the subject property helps to justify a value conclusion. If similar items under similar conditions are selling for X dollars, than it is reasonable to assume the subject property would sell for X dollars, supporting the value conclusion.

Continuing with the definition, "and those who buy, sell or use those properties." We take into consideration the context of the subject property and comparable properties. Does the subject property possess a certain provenance making it more desirable than other similar items? Is the subject property a rare example? Or was the subject property was mass-produced? This context provides a foundation for understanding the piece and its significance or lack thereof in the marketplace and will provide guidance in determining value. It is our job to understand if buyers are actively seeking out these properties and paying a premium, suggesting an uptick in the marketplace, or if the opposite is true, where there is a large supply and little demand, indicating declining value.

Take Victorian furniture for example. Knowing that the marketplace is inundated with pieces, causing a large supply coupled with a decrease in demand for such items, the values generally go down. However, each piece in an appraisal assignment is evaluated on its own to determine the monetary relationship between the subject property and comparable items to determine the qualified value.

The Comment after the value definition states value is never a fact because it is an economic concept based on an opinion as of a specific point in time in accordance with a specific value definition and must be qualified. The economic concept represents our value conclusion and is an opinion based on research of comparable items in the marketplace as of a specific point in time, taking into consideration the requirements of the value definition for the assignment. Our value opinions are qualified to indicate fair market value, retail replacement value, or other value depending on the assignment. These opinions are established at one point in time and are not to be used at any other point in time or for another qualified value.

In dealing with personal property, remember the various levels of trade for the huge variety of items you will be appraising. These levels include but are not limited to auctions, galleries, retail outlets, flea markets, consignment, garage sales, or the like. They will produce a variety of sales results and depending on the problem you are solving for your client, the selection of the proper marketplace is paramount in order to determine value and provide credible assignment results for your client.

- Tim Luke, ISA AM, CAI, BAS, MPPA has 28 years of experience in the auction and appraisal industry, and is currently the Executive Vice President, Senior Appraiser for Gurr Johns, Inc. based in Florida. He travels the United States doing appraisals, valuations, and brokerage for clients.

Ask an Instructor: Workfiles and USPAP Updates

ISA members are invited to send in their questions on all things appraising and education to ISA's instructors. One of ISA's instructors will share answers on the ISA Now Blog. Please send questions to directorofeducation@isa-appraisers.org.


Here's a great question from the most recent USPAP Q&A distributed by The Appraisal Foundation:

Question: I completed an appraisal report that was used by my client in litigation. My report was entered into evidence, but I did not provide a deposition and did not testify at the trial. How long must I retain my workfile since there was a judicial proceeding?

Answer: The RECORD KEEPING RULE states: "An appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last." (Bold added for emphasis) In this scenario, the appraiser did not provide testimony, therefore the workfile must be retained for a minimum of five years after preparation.

Question: Do you know what's coming ahead in the 2020-2021 edition of USPAP?

Answer: Although the 2018-2019 edition went into effect a little over six months ago, the Appraisal Standards Board (ASB) has already issued a first exposure draft of the 2020-2021 edition. Read more about the proposed changes that could be forthcoming. ISA supports the recommendations included in ASB's First Exposure Draft which endeavors to further clarify and refine protocols related to Reporting Options, Scope of Work, Comments in Standards Rules and Definitions. A second exposure draft will be distributed by the ASB later this year for further review and comments, and final revisions will be adopted in early 2019 to become effective on January 1, 2020.

- Meredith Meuwly, ISA CAPP
Director of Education

Tips for Writing a Great Appraisal Report

Libby Holloway, ISA CAPP

Members of ISA can give a wide range of answers when asked why they joined the organization. Popular answers are for networking, continued education, and taking advantage of name recognition. The less exciting but basic truth is that most of us joined ISA to learn how to write an appraisal report.

During the Core Course, students are instructed in what the required elements of a report are according to ISA and USPAP standards. Students practice developing the report by determining intended use and objective use, appropriate values to seek, and which markets to use. Checklists to help members include necessary information are provided, and students are required to present a successful report properly using these lessons in order to earn designations. Subsequent courses help members stay up to date on changes. Anyone with the designation of Member or above has all the information they need to write a good appraisal report - but do we all always follow through?

ISA does require that certain essential elements be included in reports created by members. After these elements are met, there is little direction in how they are expressed within the report. Here are a few common pitfalls (assuming the correct intended use, objective and approach to values are used) and how to avoid them:

• Adding confusing extra information. State the facts. In an effort to include required elements pertinent to the appraisal assignment, extra elements not needed for the intended use are sometimes included. This extra information can be confusing and misleading to the reader.


• Boilerplate boredom. I know it is easy to feel you've written the same report a hundred times but beware getting lazy with boilerplate text. Every assignment is individual, and nothing is more embarrassing than including information within a template that doesn't apply to the current client.


• Presenting correct information in a confusing manner. Following the order of items as they appear in the checklist might seem to cramp your individual creativity, but in reality, following the order helps you present information in a cohesive manner which makes it less confusing to your reader.


• Writing as if your client is a professional appraiser. Remember that your client, even if they are a collector or an attorney, is probably new to appraisal terminology. Make sure you fully define each concept within the cover document so that your reader understands what you are telling them. I suggest reading the completed report through your appraiser eyes to make sure it is compliant then through your client's eyes to make sure it is understandable.


• Making grammar and spelling mistakes. Make sure you properly edit your work or hire someone who can. Misspelled words and poor grammar dilute your report and give your readers the idea that you don't know what you are talking about even if you are an expert.


• Improper placement of the USPAP certification. ISA standards do not specify where the USPAP Certification must fall in the cover document. USPAP does require that it is signed by the appraiser/appraisers performing the appraisal. Put the statement in a place in your report where it is easily read and where your signature is affixed. It is fine to put the statement at the end of your cover document above the signature for the entire document. If anywhere else, it must have its own signature.


• Incomplete descriptions of items in the body of the report. Remember the rule of thumb that the reader should be able to pick out the item by your description whether or not a photo is included. Write the descriptions so that every intended user for the report can understand what you are describing. If you include a lot of descriptive terms that may be new to your user, include a glossary.


• Missing out on the bottom line. Your client is looking for the bottom line, don't hide it. Make sure you clearly express the values sought, markets analyzed along with their conditions, and make sure your values are easy to find.

In order to be seen as the professional you are, make sure that your report is a carefully prepared product. Never fail to check and re-check your final report no matter how anxious you are to collect the balance and move to the next project. Word of mouth is still the best advertising for your services and you want all those words said about you to be positive.

- Libby Holloway, ISA CAPP