Equipment Appraisal Blog | Understanding Machinery Appraisals

Have you ever driven by an abandoned facility or work site and seen equipment that looks like it has been sitting there for months or even years, neglected and exposed to the elements? You can tell just from a casual view that the machinery is in dire need of major repair work or is otherwise headed to the junkyard.

This may be an extreme and broad example of how the value of equipment can be greatly affected by lack of maintenance, however, from an appraiser’s perspective, the history of an asset’s operation and care is a critical component to supporting value.

Most accredited and certified appraisers are not mechanics or technicians, and therefore cannot independently assess the cost of bringing equipment back into good operable condition. Therefore, an assumption is typically made stating that the associated values assume normal conditions exist, or they receive details from the owner or a qualified third party stating otherwise.

Even when a general visual inspection is part of the valuation effort, it is assumed that normal operating conditions exist, and effective maintenance history has been completed over the life of the assets unless the appraiser is told otherwise. If it is evident during the inspection that the assets have been out of service for an extended period and need repair work, the appraiser can apply a reasonable penalty to account for this, however, without support of the specific circumstances, the adjustment will be very broad in nature.

The fact is that in any situation, the appraised value is heavily predicated on the assumption that a potential buyer will be able to operate the equipment with minimal to no reinvestment once ownership changes hands. If the appraiser knows this is not a correct assumption, then they must determine a way to account for this that can be supported by their experience or ideally with a qualified assessment of repair costs.

Poor maintenance practices and long-term lack of use will eventually lead to a shortened life and significant repair costs for virtually all types of equipment, vehicles, and even certain personal property. If you own these types of assets and you know they will be out of service for an extended period, it is important to store them in a protected environment and keep the components running once a week or so to maintain them properly. This way, when it comes time to use them again or sell them on the open market, you can rest assured they will function reliably for you or your buyer.

As a business owner, when you determine it is time to sell off older equipment and upgrade to more recent or even brand-new makes and models, you will need to enter the market and begin to research options to effectively handle the transition. It’s only logical that you will seek to understand both new and used machinery pricing based on what is available from dealer networks and other sellers. Obtaining an independent appraisal of your existing fleet will be very helpful in validating and comparing your thoughts and findings, ensuring your ability to make a fully informed decision.

As part of an equipment appraiser’s analysis, they will research and source comparable market information, while also analyzing available databases and their experience valuing similar assets in the past. Used equipment asking prices and recent sales are important to review during this process, however, it is just as important to understand the new machinery market and gain this additional perspective.

Replacement Cost New is the formal term for what brand new equipment should sell for in the current market, or as of the effective date of valuation. Machinery and Equipment appraisers can utilize this component of their research in several ways when comparing it to the other market data they develop. It is a principal element of the Cost Approach to value.

An appraiser should first determine a reasonable pattern or relationship between the new and used pricing while taking into account the equipment’s age, useful life, and commonality in the resale market. For instance, how does new pricing compare to what was originally paid for the machinery being appraised? What are typical levels of market depreciation on a year-to-year basis from newly purchased to the end of the equipment’s initial life cycle?

A seasoned professional will look to estimate new replacement cost for machinery based on available market information from the manufacturer or representative vendors. Utilizing industry trends from broad indexes and applying them to historic pricing is not nearly as reliable as direct market data and should only be used as a last resort. The same goes for developing estimates of depreciation and useful life. An experienced appraiser should never assume straight-line accounting-type depreciation is applicable in the valuation industry.

Even if an appraiser has a multitude of used comparable sales information to consider, they should not neglect to understand replacement cost new, as well as the other components of the cost approach. This complimentary style of appraisal is more reliable and supportable than relying solely on a single approach.

When you decide it is time to replace your equipment and engage an appraiser to assist in the overall effort, ask about these types of methodologies and approaches to ensure you are working with the most competent professionals.

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If you thought the end of the year might bring some normalization to the used vehicle and heavy equipment markets, think again. With two months to go until 2023, there has been little, if any, downward movement in price levels, and best-case predictions are that prices will level off to around 20-25% higher than in 2019-2020.

Even the most optimistic analysis for potential buyers will amount to the fact that normal depreciated loss in value seen year to year for used machinery has not only been wiped out but, has been substantially reversed in the form of appreciation. What is likely to happen is at least another year of inflated values for used equipment until the supply chain issues have been significantly adjusted to allow for new vehicle and equipment manufacturing levels to meet demand again. The effect of this is vastly higher than any typical annual cost of living increase which shakes up every measuring stick used in the past several decades.

This type of market activity has also thrown the appraisal industry for a loop. Recent vintage assets (1-5 years old) can commonly be seen priced where new machinery should be, and even above this level at times. Older equipment (10-20 years) levels are now where you’re used to seeing them for slightly used machines. The longer these trends continue, the more weight appraisers will need to place on this effect.

Common pricing databases are now reflecting these patterns as well. What was once thought to be difficult to support from a longer-term trend perspective is now becoming a permanent adjustment in the market that will likely not reverse even when things start to normalize. Insurance companies will need to consider this if they haven’t already when estimating depreciated replacement cost settlements for personal property. Accountants may see an opportunity to recapitalize their company’s asset values based on the support of the data being presented.

Similar to what has recently occurred with inflation on things like gas and food costs, the price will peak so greatly that when it eventually settles, it will probably remain significantly higher than it was a few years ago. Don’t fool yourself into thinking that the longer-term effects of inflation aren’t a big deal, and that pricing will go back to where it was “back then”. Based on everything we’ve seen in 2022, along with recent predictions from the experts in the field, we should get used to the elevated pricing in the used vehicle and equipment markets.

If you believe an updated valuation of your company’s assets might make sense given these changes in the market, ensure you engage with an accredited, certified appraiser to best understand the effects this may have on your long-term goals.

Equipment appraisers are sometimes asked which is the better source for researching used machinery market activity: current listings or public databases which reflect recent historic sales.

The answer is that both sources are very useful, and should be considered wherever possible, to create a balanced perspective when valuing machinery & equipment. Each has its pros and cons which need to be understood in order to reach the most reasonable conclusion when weighing the data. Experienced M&E appraisers know that taking any particular source of information at 100% face value, without the broader context of related data and approaches can lead to poor results.

Here are a few additional insights to consider when reviewing both used equipment listings and sales databases:

Equipment Listings for Sale

When appraisers are able to locate a significant amount of available listings for the assets they are researching, it may seem only logical that this would be the best source of information, given it is coming directly from an active secondary market. That may be true up to a point, however, you need to qualify these listings and consider only those that come from valid resellers, and are not priced out of any reasonable range of value. Even when you narrow these down in this way, you should also consider discounting the listing price to reflect what would typically be realized with a final sale. It is common practice for used equipment dealers to price their machines over fair market value, to allow room for negotiating.

Other things to consider would be location; how long the machine has been for sale; how many similar items are available; if it is refurbished and being sold with a new short-term warranty.

Machinery Sales Databases

Historic sales databases can be found either through annual subscription providers or in the public domain and can include both dealer and auction-level activity. The key thing to keep in mind with this information is that it can be based on very small samples or, on the flip side, consider too broad of a market, which in both cases can skew the results.

Some of these databases can be a good source to confirm the new cost, year, make, and model of the assets being appraised, as well as capacity specifications. Certain databases also attempt to create estimated values for the machinery over time, which is useful when forecasting future values with used equipment. That said, it is prudent to consider if the data makes sense in the context of the other sources you are researching and relying on.

In summary, both of these types of market data should be researched and considered when available to an appraiser. They should always use their judgment based on the reliability of the information, in the broader context of their experience and overall approach, to reach a reasonable conclusion of value when completing a machinery & equipment appraisal.

There are times when used equipment dealers and resellers are asked to provide estimated values for the types of machinery they sell. Alternately, independent equipment appraisers have clients who wish to market their assets for sale, while asking the appraiser if they have experience liquidating the M&E they value. There are both similarities and differences between independent machinery & equipment appraisers and used equipment resellers, which creates a fine line between the two that should never be crossed.

When researching market values, equipment appraisers will contact used machinery dealers in the relevant industry, such as earthmoving, truck transportation, or parts manufacturing, to name a few. These vendors can provide insightful data to the appraiser, specific to the makes and model types they sell, which becomes one of several sources relied upon during the valuation analysis.

Equipment dealers often provide their clients with estimates of value prior to engaging in a resale effort, to assure them of their experience and to manage expectations for the eventual prices realized at sale. Both appraisers and resellers are continually crossing paths in the used equipment marketplace, even though their primary focus is quite different.

Here are some other distinctions to consider:

An accredited appraisal is an independent, unbiased opinion of value based on a blend of approaches and methodologies which, in part, consider the opinions of certain used equipment dealers. An experienced equipment appraiser will consider multiple sources before ultimately concluding on a value opinion.

This opinion is not a guarantee of a sale price outcome and the information they receive from equipment dealers will be subjectively weighed, depending on the rest of the information they gather. Equipment appraisers typically have a broad degree of experience in many distinct markets and industries, directly tied to their client’s businesses.

A used equipment dealer, on the other hand, will usually focus on a particular market, and more specifically, certain makes and models of machinery with which they have built their support and credibility over the years. These dealers will have a significant amount of expertise in these more refined areas but their primary goal is in the sale of equipment. While they understand value as a result of this experience, they are not considered independent or accredited appraisers. There may even be some level of bias in their opinions, given their ma objective is to sell, not appraise.

In summary, appraisers and used equipment resellers are quite different in their overall skill sets, however, the markets they work in often overlap. It’s prudent to understand the distinctions of each, so you can create the most beneficial team around you when it is time to consider buying, selling, or financing your machinery & equipment.