Excerpt from the Journal of Advanced Appraisal Studies - 2010

This is the final installment of excerpts from the 2010 Journal of Advanced Appraisal Studies. This article by Robert J Corey and Robert W. Cook is entitled Lack of Objectivity Leaves Appraisers at Risk: Index Adjusted Good-Better-Best Appraisal Model Offers Partial Solution.

I have long been interested in pricing models for fine and decorative arts, and wrote for the 2008 Journal of Advanced Appraisal Studies Quality Condition Adjusted Mean Methodology: A Comparative Valuation Tool for the Appraiser, and in 2009 I co-authored with one of the authors of this article, Bob Corey, Combining Metrics, Standards and Connoisseurship: A Weighted-Factor Scoring Model.  This interesting article by Corey and Cook discusses using indexing, such as the Consumer Price Index to adjust scoring and final valuation adjustment.

Example of Objective Price Adjustment

Suppose that on July 31, 2009, you contracted to appraise a Georgian inlaid oak Welsh Dresser, mid-18th century, the cornice with dentil inlay and scalloped frieze, side compartments and door with shell inlay, base with deep frieze drawers, star inlaid pendant, and cabriole legs, ending in pad feet. A search of auction results within the last few months is unlikely to yield evidence of the sale of a wide selection of close comparables from which to choose. However, you note that on October 6, 2007, Neal Auction Company of New Orleans sold at auction a qualitatively similar and characteristically equivalent property for $7,931 including buyer’s premium. Before launching into a value ranking analysis of this potential comparable to determine its quality and value relationship to the subject property we need to adjust the price realized to reflect how inflation and market fluctuations have influenced the value of this sale over time. Making use of a CPI calculator, we find that inflation has driven the original price realized up 3.45% to $8,204.89 in current dollars.

Adjusted dollar amount $8,204.89
Base CPI Index 208.49
Adj. CPI Index 215.69

Turning to the calculator for major market indexes, we can create a chart to illustrate what the market has done to our original $7,931 since its realization in October of 2007.

A quick glance at the resulting chart indicates that the major market indexes have all fallen in the neighborhood of 30% to 35%. Utilizing the objective information provided we can than estimate that the out-of-date comparable price realized of $7,931 has increased 3.45% because of inflation and decreased 32.5% in a falling market. We conclude that in the current market (July 31, 2009) the comparable in question would likely command a price of $5,627.00 including buyer’s premium.

Adjusted Price Realized = ($7,931 + 3.45%) - (32.5%)
($7,931 + $273.62) – (2,577.58) = $5,627.04

The same adjustment procedure is applied to each of the selected comparables and the results represent objective inputs to the model. If current comparables are located, there is no need to apply the adjustment because those comparables will represent the state of the current market.
All proceeds from the sale of the Journal support the educational initiatives and scholarships of the Foundation for Appraisal Education. The cost of the journal is only $55.00, a bargain for the amount of content supplied, and for a short time shipping is free. For more information visit www.appraisaljournal.org to order your copy.

No comments: