Why is an Appraisal Necessary? Who is Qualified to do it?
No one has a note appraised because it’s a fun thing to do!
Having a promissory note appraised is as much fun as getting a root canal. No one gets an appraisal unless they are in” pain”; usually the pain is caused by some third-party like an attorney, or by the Internal Revenue Service (IRS). Let’s look at some of the reasons why promissory notes must be are appraised, and some of the many different types of appraisal valuations possible.
First, exactly what type of appraised valuation are we seeking?
There are numerous appraisal types. There is fair market value, fair value, market value, liquidation value, future value, prior value, personal value, investment value, cash value, discounted value, and fire sale value—to mention the most common types. You must know what type fits your needs.
The type of valuation that you need depends on the why the valuation is needed—who is asking for it. If litigation is pending, a formal valuation is required. The main driver of appraisal valuations is the Internal Revenue Service (IRA). All tax related matters must be valued according to IRS rules and regulations. Let’s examine the IRS requirements for promissory note appraisals.
IRS Revenue Ruling 59-60
Appraisal valuations of assets for marriage dissolution, partnership dissolution, ESOP reporting, IRA accounts, and estate and gifting valuation all require a formal appraisal report that complies with IRS Revenue Ruling 59-60.
The appraisal of promissory notes is required for income tax, estate tax, gift tax or other Federal tax purposes in the following situations:
For most types of business and personal asset sale or distribution
For a business sale transaction
For tax advice and planning questions
For gifting, and other taxable transactions
For Gift Tax planning
For Charitable Contribution planning
For related party (family members) asset distribution planning
For dividing assets within a divorce settlement
For dividing assets within a partnership settlement
For self-directed IRA account valuations, distributions, and asset sales
Who is qualified to do the appraisal?
A qualified appraiser is an individual who meets the following requirements:
A. has earned an appraisal designation from a recognized professional appraisal organization, or
B. has demonstrated competency in valuing the type of asset being appraised; and
C. has met certain education and experience requirements while valuing the type of property being valued; and
D. has regularly prepares appraisals for which he or she is paid
Factors Affecting Note Valuation
The following list outlines thirteen factors for consideration: Language clarity of the loan documents; Terms and conditions of the loan documents; Interest rate; Duration of the loan; Payment schedule; Payment history of the loan; Financial strength of the borrower; Collateral security; Economic conditions; Marketability; Liquidity; Collectability; Risk factors
Valuation is Not an Exact Science
There is a false sense of precision regarding valuation conclusions. Because there is no publicly traded market for these types of assets, determining the Fair Market Value is as much an art as a science. Each type of asset is unique; each has its own special terminology, collateralization, and history. Usually, these types of assets have been custom designed by an attorney to satisfy the specific needs of the parties doing the transaction.
Two equally competent appraisers may take different approaches and make different assumptions.
They probably will not arrive at the same valuation figure, but, normally, they will come within 10 to 15 percent of each other.
Lawrence (Larry) Tepper specializes in:
Promissory & Mortgage Note Appraisals and Valuations Nationally
Expert Consulting and Advising Services-Free Appraisal Quotes
Free review of note file and discussion of options
EDUCATION AND TRAINING
Law Degree /Accounting Minor University of Denver
Managing Colorado Real Estate Broker– Promissory Notes Specialization
Certified Commercial Investment Member from the National Assoc. Realtors (CCIM)
35 + years of national promissory note and mortgage note appraisal and valuation for Attorneys, CPA’s, Estates, Trusts, Executors, Administrators, and Financial Advisors