There are many terms in the appraisal profession that describe and define various concepts of value. “Investment Value” is a term with which the public is not necessarily familiar, but is an assumed value concept that has confused appraisal clients for many years. However, anyone contemplating an investment of any kind has made an analysis of that potential acquisition.
Like many value scenarios used repeatedly, “Investment Value” as a defined scenario can be labeled as a “word of art,” as the assigned label is not necessarily defined in the same manner as it is in Webster’s. In this instance, “Investment Value” is similar to Webster’s, as the concept scenario does encompass a portion of the definition found in Webster’s. Webster’s defines “invest” as: “to lay out capital with a view of profit”; “Investment” as: “the act of investing, the capital invested to produce interest or profit”; “Investigate” as: “to inquire into, to examine thoroughly”; “Investiture” as: “to make a purchase or an investment”; “Value” as: “worth, utility, importance, estimated worth or valuation, precise significance, equivalent, to estimate worth of, to hold in respect and admiration, to prize”; “Valuable” as: “precious; worth a good price, worthy, thing of value,” “Valuate” as: “to set value on, to appraise”; and “Valuation” as: “value estimated or set upon a thing, appraisal.”
“Investment Value” as a “word of art” is an analysis and subsequent action that contain all of the above definitions used in Webster’s as well as assumptions contained within “Fair Market Value”. To simplify, “Investment Value” is a de facto occurrence when a transaction takes place that exceeds general market trends. In other words, the individual’s decision may seem monetarily extreme yet is substantiated by a specific need, idea, and desire directly related to some form of gain, whether it is monetary, emotional, or both. Investment considerations involve an analysis of all relative facts (in an investor’s estimation), from which follows a calculation of the percentage of risk, capitalization rate, and the holding period required to realize the amount or type of anticipated return to make the investment worthwhile.
An example of “Investment Value--Monetary” would be if an individual were to purchase a machine in below average condition at an average market price. He then invests additional monies in that machine to restore its useful life. Justification for this action could be to meet increased production demands, which warrant the expenditure on additional equipment. Therefore, his incentive was not price but need, allowing increased production that would generate increased revenue and ensure profit.
An example of “Investment Value--Emotional” would be when an individual purchases an item because of sentimental reasons despite cost. The cost is justified by personal satisfaction gained through ownership of that particular item. In this instance, the analysis is not explicitly analytical but is internalized and calculated no differently than the monetary investment.
The position of an appraiser, relating to both examples, considers that the money invested for restoration as well as the inflated price paid, was a premium. In both instances, the value would not be in line with the general market. A typical buyer purchasing under forced conditions or not, would not generally have the same motivation or incentive as the individuals who made the investments described in the previous examples. When all historical data on a specific item is correlated, the appraiser must report his findings accordingly, an appraiser does not make a market; he merely reports it.
It could be argued by the buyer in the first example that if he were willing to pay above market for an obsolete machine or one with limited market appeal or even one with high difficulty of removal, his price must be the market. However, in the second example, the buyer would most likely attribute the premium he has paid for the item to his circumstance and would be more realistic about actual recovery or worth, to the public. If not, however unfortunate, the response to both scenarios is that:
1. A single sale does not constitute market reaction;
2. An appraiser cannot base his value conclusion on what is possible but must rely on historical data, which signifies what would be considered reasonable and probable under the confines of the value concept being applied. As appraising is not at exact science but perhaps a science with error bars, this is accomplished through due diligence by:
3. Drawing on life experience,
4. Consultation with peers,
5. Gathering comparable data,
6. Checking with dealers, distributors, and manufacturers,
7. Client input,
8. Gathering source documents, and
9. Using general industry knowledge.
However, the bottom line is only as good as the signature; the signature is only as good as what it represents, which encompasses the individual and, if applicable, the corporation backing the signature.
There are many practicing appraisers who believe they are the gurus of appraising and that there is no better practitioner than himself or herself. Today, in a trade such as appraising which has developed into a profession, the measurement of probability is accomplished with a higher degree of accuracy. Educational programs such as the “Valuation Science” degree program introduced by the American Society of Appraisers at Lindenwood College in St. Charles, Missouri, can educate the old and new alike. In addition, there are the various discipline educational courses, seminars, and specialized programs, speakers at various appraisal organization meetings and books that address the various issues. This type of individualized education will bring uniformity to the profession, making value theory, development, and ethics and practice more of a science.
So next time there is a difference of opinion between the appraiser and the client; consider the possibility of confusion with “Investment Value.”
