ASA AM cheat sheet

USPAP Standards 3 and 4 govern appraisal review: Standard 3 covers development of a review opinion, Standard 4 covers reporting it.

A review opinion may conclude that the original analysis is complete and correct, or may require additional data, revised analysis, or a different value conclusion.

Three review types: administrative (compliance check), technical (methodology and data scrutiny), and value review (independent value conclusion).

Reviewers must identify the scope of review work, the intended use, and whether the review is retrospective or concurrent with the original report.

An appraisal management company (AMC) must maintain records of assignments, appraiser qualifications, and communications for the applicable USPAP record-retention period (5 years).

Reviewer independence requires no fee arrangement contingent on the review outcome and disclosure of any prior involvement with the subject property.

Standard 3 review requires the reviewer to have competence in the property type and to disclose any limitation on the review scope.

A reviewer who disagrees with the original value must state the basis for the disagreement and, if a value is developed, support it independently per Standards 1 and 2.

Three approaches: income (DCF, capitalization of earnings), market (guideline public companies, M&A transactions), and asset-based (adjusted net asset, liquidation).

Capitalization of earnings: Value = normalized earnings / (discount rate − long-term growth rate), where the denominator is the capitalization rate.

DCF: PV = Σ [CFt / (1+r)^t] + terminal value / (1+r)^n.

Discount for lack of marketability (DLOM) reflects restricted-stock studies and pre-IPO studies; typical ranges 20–40% for closely held interests.

Discount for lack of control (DLOC) applies to minority interests; control premium studies infer the inverse relationship.

Normalization adjustments remove nonrecurring items, adjust owner compensation to market, and eliminate personal expenses.

Weighted average cost of capital: WACC = (E/V) × Re + (D/V) × Rd × (1 − t).

Enterprise value = equity value + debt − cash; equity value is the residual after debt is subtracted from enterprise value.

Fair market value per IRS Revenue Ruling 59-60 considers: nature of business, economic outlook, book value, earning capacity, dividend capacity, goodwill, prior sales, and market prices of comparable securities.

The 4 Cs of diamond value: carat weight, color (D–Z scale), clarity (FL–I3 scale), and cut (proportion, symmetry, polish).

One carat = 0.200 grams; one point = 0.01 carat.

Diamond clarity grades: FL, IF, VVS1, VVS2, VS1, VS2, SI1, SI2, I1, I2, I3.

Color grades D–F are colorless; G–J near colorless; K–M faint; N–R very light; S–Z light yellow/brown.

Gemstone valuation requires identification of species and variety, treatment status (e.g., heat treatment, fracture filling), and origin where relevant.

Precious metals are valued by troy weight: 1 troy ounce = 31.1035 grams; 1 pennyweight = 1.555 grams.

Karat (gold purity) is out of 24: 14K = 58.3% gold, 18K = 75% gold, 22K = 91.7% gold.

A gemological report (e.g., from an independent laboratory) documents identity, treatment, and grading but does not establish value.

Jewelry appraisal methodology typically uses replacement cost with new or comparable quality, or market comparison for antique/estate pieces.

Three approaches: cost (replacement or reproduction cost less depreciation), market (comparable sales), and income (capitalized earnings for income-producing equipment).

Depreciation in machinery valuation includes physical deterioration, functional obsolescence, and economic (external) obsolescence.

Replacement cost new (RCN) is the cost to acquire a new item of equivalent utility; reproduction cost is the cost to replicate the identical item.

Physical deterioration is measured by age/life method, observed condition, or a combination; the age-life formula: % depreciation = effective age / total economic life.

Functional obsolescence may be curable or incurable; curable when the cost to cure is less than the value added.

Economic obsolescence is external to the asset (market conditions, regulations, reduced demand) and is applied after physical and functional depreciation.

Orderly liquidation value assumes a reasonable marketing period; forced liquidation value assumes a short, constrained timeframe.

Fair market value in continued use includes installation, freight, and setup costs; fair market value in place includes real property integration.

Useful life and effective age differ: effective age reflects actual condition and use, not chronological age.

The three approaches: cost (replacement or reproduction cost less depreciation), market (comparable sales), and income (for income-producing personal property).

Personal property includes tangible movable items: furniture, art, collectibles, antiques, equipment, and household goods.

Replacement cost new (RCN) is the cost to acquire a new equivalent item; reproduction cost is the cost to recreate an identical item.

Depreciation methods: age-life (straight-line), observed condition, and breakdown method (physical, functional, economic).

Value in use assumes the item remains in its current use; value in exchange assumes a sale transaction.

Antiques and fine art are typically valued by market comparison; reproduction cost is often inappropriate for unique or one-of-a-kind items.

Intended use drives value definition: insurance (replacement cost), estate tax (fair market value), and liquidation (orderly or forced) differ.

A personal property appraiser must inspect items in person or document the basis for any desktop or hypothetical valuation.

Provenance and authenticity documentation materially affect value for art, collectibles, and signed pieces.

Three approaches: sales comparison, cost, and income capitalization.

Sales comparison: adjusted value = comparable sale price ± adjustments for differences (location, size, condition, time).

Cost approach: value = replacement or reproduction cost new − depreciation + land value.

Income approach: value = net operating income / capitalization rate; gross rent multiplier = price / gross rent.

Direct capitalization uses a single-year NOI; yield capitalization (DCF) uses multi-year cash flows and a reversion.

Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.

Gross income multiplier (GIM) = sale price / gross income; effective gross income = potential gross income − vacancy and collection loss + other income.

Depreciation in real property: physical deterioration (curable/incurable), functional obsolescence (curable/incurable), and external obsolescence.

Adjustments in the sales comparison approach are applied to the comparable, not the subject; a superior comparable requires a downward adjustment.

Review reports must state the reviewer's scope of work, sources of information, and any extraordinary assumptions or hypothetical conditions.

An AMC must ensure appraisers hold appropriate state credentials and are not on any exclusionary list.

Reviewer's own value opinion, if developed, must comply with Standards 1 and 2 in addition to Standards 3 and 4.

Record retention under USPAP: 5 years after the report date or 2 years after final disposition of any judicial proceeding, whichever is later.

Review of a report must consider the report's compliance with USPAP, the appropriateness of the value definition, and the sufficiency of the data.

Revenue Ruling 59-60 factors guide fair market value for federal tax purposes for closely held businesses.

Minority interest value = pro rata enterprise value × (1 − DLOC); control value = minority value × (1 + control premium).

Guideline public company method uses valuation multiples (EV/EBITDA, P/E) from publicly traded comparables, adjusted for size and risk.

Excess earnings method (treasury method) capitalizes earnings above a reasonable return on net tangible assets to derive intangible value.

Terminal value in DCF = final-year cash flow × (1 + g) / (r − g).

Diamond cut grading considers brightness, fire, scintillation, and design/craftsmanship (proportion, symmetry, polish).

Carat weight has a disproportionate effect on per-carat price: prices rise nonlinearly at key weight thresholds (e.g., 0.50, 1.00, 2.00 ct).

Treatment disclosure is mandatory; undisclosed treatments materially reduce value and may constitute fraud.

Pearl valuation considers nacre thickness, luster, surface quality, shape, size, and color.

Colored stone value depends on hue, tone, saturation, clarity, cut, and origin; origin premiums exist for certain stones (e.g., Kashmir sapphire, Burmese ruby).

Fair market value (removed) vs. fair market value (in place): removal costs and installation costs are deducted or added respectively.

Auction value (forced liquidation) reflects a constrained marketing period, typically 30–90 days or less.

Cost to cure is compared to the value added to distinguish curable from incurable functional obsolescence.

Sales comparison in machinery uses adjustments for condition, age, hours of use, and accessories.

Machinery appraisers often use the 'rule of thumb' multipliers applied to original cost, indexed to current dollars.

Insurance appraisals typically use replacement cost new without deduction for depreciation; estate appraisals use fair market value.

The breakdown method separates physical deterioration (curable/incurable), functional obsolescence, and economic obsolescence.

Comparable sales for personal property must be adjusted for condition, age, rarity, and market timing.

Fine art valuation often requires connoisseurship, provenance research, and auction comparables; reproduction cost is generally not applicable.

A hypothetical condition (e.g., item assumed in good condition without inspection) must be disclosed in the report.

Effective gross income (EGI) = potential gross income − vacancy and collection loss + other income.

Net operating income (NOI) = EGI − operating expenses; excludes debt service and income taxes.

Capitalization rate = NOI / value; it reflects risk, growth, and return expectations.

Gross rent multiplier (GRM) = sale price / monthly rent; GIM uses annual gross income.

External obsolescence is typically measured by market extraction, comparing the subject's income or value to a comparable unaffected property.