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The Role of Appraiser as Trusted Adviser

Date: Nov 01, 2018 @ 07:00 AM
Filed Under: Asset Management

How often are appraisals ordered simply because they are needed for the file? Of course, the client is going to qualify for financing regardless of the results of the appraisal. Their balance sheet alone indicates that a Forced Liquidation Value (FLV) or Orderly Liquidation Value (OLV) appraisal result will come back with a number more than sufficient to get the deal done. How often does a lender indicate the hoped-for results when ordering the appraisal?

And how often do the results come back and not support the financing contemplated? How often does an appraiser hear that they issued a “poor” report because the lending institution now cannot finalize funding because the opinion of value rendered is surprisingly different than expected?

A recent example of an appraisal in the Oil and Gas space was clearly showing FLV on the summary page but buried many pages later in the fine print was the full definition. But that appraiser, perhaps only in this instance, was defining FLV as a two-year sale process. This is clearly outside the “norm” in terms of standard definitions of FLV.

The current economy is vibrant and busy; auctions are active and procurement departments are spending their budgets. IMTS this year was, by many reports, one of the more active shows in regard to generating orders. As such, OEM lead times are creeping up because of the strong demand. And Pack Expo experienced similar activity. All indications, at surface level, are that this vibrancy will continue for an extended period of time. Orders are being placed now for equipment to be delivered over the next several months. It is this same vibrancy that is creating an illusion of value when appraisals are being ordered. Everything is “good,” therefore values must be at an all-time high—and, of course, no appraisal should come in low.

This is exactly the time to use your preferred appraiser or appraisal firm as a trusted resource. Do not just use an appraisal as a justification to do a deal. Instead, use the appraisal as a tool to understand and mitigate the risk when the deal is funded as well as for the risk later during the course of the term.

It also is important to use an appraiser that has a deep understanding of the industries they are appraising, and one that knows well the industries that are not in their bailiwick. Appraising tends not to be a one-size-fits-all approach. When a firm asserts they can provide valuations within all industries, there is a high probability that it may be operating at the fringes of, or outside of, its area of equipment expertise.

All values in every sector are not consistent. There are industries seeing consistency in values while others are seeing significant year-over-year depreciation. Ask your appraiser the following questions:

  • Does my client have multiples of the same equipment that will affect the opinion of values?
  • What does the market absorption look like for these assets?
  • How should this facility best be liquidated? Is it just a matter of running an auction and being done, or should there be a period of time included for orderly liquidation or private treaty sales prior to auction?
  • How long can access and time on site be obtained? What is reasonable? Many lenders ignore or do not put the proper emphasis on access. This can greatly change the liquidation strategy and overall results.
  • What are the actual definitions of FLV and OLV being used in the appraisal report? Is there a clear statement upfront of definitions, as well as the time period used for valuation? Are those in line with industry standards? Are these assets going to decline in value fairly consistently or are they in an industry seeing tumult? What does the future value look like?

Lenders need to be careful for what they are asking. They need to order a report, gain an understanding of the results and engage in a dialogue with both the appraiser and their client if the appraised value is causing a change in the planned financing structure.

The appraiser should remain neutral from a value perspective and be a trusted advisor to the client ordering the appraisal.

John Hagist
Controller, VP Appraisal Services | Loeb
John Hagist is an industry professional with over twenty five years’ of finance experience within the manufacturing industry. As a Vice President at Loeb, he heads the Appraisal and Finance divisions for the company. Hagist holds a BA in from Hamilton College.

For five generations since 1880, Loeb has been a trusted provider of reliable equipment and related services that help manufacturers and financial institutions leverage their industrial assets by managing the equipment lifecycle. Headquartered in Chicago with a 150,000 square foot facility, Loeb provides: equipment sales, purchases, rentals, leasing & liquidations, certified market appraisals from Loeb Appraisal, auction services & asset disposition from Loeb Winternitz Industrial Auctioneers, and equipment financing from Loeb Term Solutions.

Loeb and all of its divisions are experts in providing equipment solutions to the: food, pharmaceutical, cosmetics, chemical, metalworking, woodworking, plastics, and printing industries.
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