Equipment Appraisal Blog | Understanding Machinery Appraisals

Machinery & Equipment Appraisals - The Market is Everything

Posted by Equipment Appraisal Services on Mon, Jun 28, 2021 @ 08:00 AM

Machinery Equipment Appraiser Sales Comparison Cost Approach

For machinery & equipment (M&E) appraisers, there are basically two approaches to value that are ultimately relied upon when completing valuations: the Sales Comparison Approach and the Cost Approach.

Here is a brief description of each:

The Sales Comparison Approach

The Sales Comparison Approach indicates value by analyzing recent sales (or offering prices) of properties that are similar (i.e., comparable) to the subject property. If the comparable data is not identical to the properties being appraised, the selling prices of the comparable items are adjusted to equate them to the characteristics of the properties being appraised.

The reliability of this technique is dependent upon the degree of comparability of each property with the property under appraisal; the time of the sale; the verification of the sale data; and the absence of unusual conditions affecting the sale. This approach focuses on the actions of actual buyers and sellers.

The Cost Approach

The logic behind the Cost Approach is the Principle of Substitution: a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of an equivalent utility.

Using the Cost Approach, the appraiser starts with the current Replacement Cost New of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence.

The third approach to value, the Income Approach, is rarely used for M&E appraisals, and I will leave that discussion for another time. The Sales Comparison Approach is also commonly referred to as the “Market Approach”, however, don’t let that trick you into thinking the only time you rely on market data is under this approach. To effectively use the Cost Approach, an appraiser should rely on the marketplace as well, to estimate the variables involved with this approach, including replacement cost new, useful life, depreciation, and salvage value.

Perspective From Both Approaches

Every appraiser has their own process as to how they ultimately utilize the tools available to determine value. It is ultimately an independent, unbiased, subjective opinion, based on the gathering of a reasonable amount of data, which is developed during a research and analysis process.

To that end, from my experience, I have found it beneficial to take components from both approaches, established directly from the marketplace, and create a dual perspective that ultimately forms credibility checks to both, and provides the appraiser with supportable conclusions. Given that comparable sales data can tend to be inconsistent from machine to machine, even from the same sources, this blended approach can create a way to make sense of all the data points and better understand how particular assets should depreciate in the marketplace under normal maintenance and wear and tear guidelines. The use of the Cost Approach in any other way, such as using straight-line depreciation to cover all forms, or trying to develop credible levels of replacement cost and obsolescence by using broad industry data, is simply not reliable or supportable.

In summary, regardless of how much weight an equipment appraiser places on either of these two approaches during a valuation analysis, they should assure their clients that the data collected comes directly from the marketplace. The independent sources that an accredited M&E appraiser can find for virtually any type of asset are out there and available, they just need to do a bit of digging to find them

Tags: equipment appraiser, cost approach, Machinery & Equipment Appraisals, sales comparison approach

Variables to Consider When Completing an Aircraft Appraisal

Posted by Equipment Appraisal Services on Mon, Jun 14, 2021 @ 08:00 AM

Machinery Equipment Appraisal Aircraft Industry

Many appraisers, buyers, and sellers involved in the aircraft industry consider the valuation of these assets unique in comparison to the rest of the equipment markets, with many businesses only willing to engage “experts” in this industry to complete the appraisal work. While it is true that the aircraft marketplace has a plethora of companies solely dedicated to working in this industry alone, when it comes to valuation, the methodologies, approaches, and data required to perform effective appraisals are very similar to the rest of the machinery & equipment markets. In fact, the very “uniqueness” in which this industry is viewed, opens the door to any number of independent sources and data points in which to gather the information required to complete a solid valuation.

Specific to aircraft appraisal, it is very common, and generally required, that for any sale, leasing, bank financing, or similar transaction, there be made available from the aircraft owner or broker, a detailed “spec sheet” that provides important data including the airframe time and landings, engine make, model, hours and cycles, avionics, interior specs, maintenance programs, ownership history, recent refurbishments, and related information. This document is above and beyond what an appraiser expects to collect during a valuation for most other types of machinery & equipment and encompasses the key parameters in developing your valuation.

Additional benefits when performing aircraft appraisals include the ability to find any number of third-party sources familiar with the industry, specific market, and make/model aircraft you’re researching, that will openly discuss and provide their opinions on. There are databases available to provide historical sales and estimated values on most types of aircraft that are built on quality information, developed over decades, by industry experts. You can also find plenty of articles written about important topics such as annual operating costs, historical fluctuations in markets, future trends based on technology advances, and any number of related areas.

In many ways, because of the constant global focus and overall significance of the aircraft industry, the amount of data available to consider when completing an appraisal is more abundant than in many other markets. An experienced, accredited equipment appraiser has all the tools available to complete a reliable, supportable aircraft valuation.

While being an “expert” in any one industry can have its advantages, the methodologies and approaches of completing an appraisal assignment are consistent across every business sector. The key components involve the collection and review of data, both specific to the asset you’re valuing, and from a reasonable number of external sources within the marketplace itself, to make the appropriate comparisons and adjustments. In all of these ways, the aircraft industry is essentially one of the most complete markets to perform appraisals in.

Tags: accredited appraisers, Aircraft Valuation, Machinery & Equipment Appraisals