All about appraisal

What does appraisal actually mean?
What kind of property can be appraised?
How does one determine the value?
What does one need an appraisal for?

What does appraisal actually mean?

Appraisal is the determination of the value of property based on certain calculation methods. A value can be determined for an apartment, a private house, a land plot, a car, a yacht, technological equipment, an office building, a factory, oil refining terminal, a patent, or any other property. In Latvia, property appraisal is performed in accordance with the Latvian property valuation standards LVS 401, developed on the basis of the IVSC (International valuation standards committee) standard „General Valuation Concepts and Principles”. Valuation process is regulated by Latvian, European and international regulatory enactments.

What kind of property can be appraised?

Any kind of property can be appraised. Property is usually classified according to its type as follows:

  • Real estate (apartments, private houses, land plots, woods, commercial objects, industrial objects, etc.);
  • Movable property (transport vehicles, technological equipment and tools);
  • Business and intangible assets.

Property can be appraised as a whole and in parts, e.g., deemed or real shares in real estate, stock or capital shares of a company, as well as rights (e.g., leasehold).

How does one determine the value?

In accordance with the Latvian, European and international valuation standards, different values can be determined for any property:

Market value

In 99% of cases appraisals are based on market value. The definition of market value is „a calculated value – an amount of money determined on the day of appraisal for which the property should be transferred from one owner to another as a result of a commercial deal between a voluntary seller and a voluntary buyer after adequate marketing; it is assumed that each party is acting competently, with consideration and without coercion”.

Market value can serve as a basis for:

  • Appraisal of collateral,
  • Property contribution to the share capital of a commercial society under the Commercial Law,
  • Attestation of property value for accounting needs,
  • Establishing a selling/buying price, etc.

Forced sale value

Forced sale value is „the amount of money that can be received as a result of selling the property within a period insufficient for adequate marketing (in accordance with the definition of market value). In some countries, a forced sale situation is a situation where the seller is acting unwillingly and the buyer/buyers are informed about the seller’s difficulties.”

The majority of credit institutions in Latvia require forced sale value when appraising property for loans.

Other types of value

Many customers in Latvia are not aware of the wide range of services that a qualified appraisal specialist can offer. Apart from the aforementioned types of value, a qualified appraiser can also determine, e.g.:

  • Property usage value;
  • Property investment value;
  • Active business value, etc.

What does one need an appraisal for?

Appraisal can be performed for a variety of needs:

  • To determine the value of loan collaterals – the majority of appraisals in Latvia are made to establish the collateral value of an object, while in the “old” EU member-states and USA property appraisals are made for a variety of other reasons. Given the fact that real estate market in Latvia is a very busy one, especially, as far as dwelling is concerned, and that banks exercise active credit policies, determining the collateral value of property for loans is and will remain, at least for some time, the top object of property appraisals.
  • To confirm a property contribution (i.e. appraisal of a property contribution) – the Commercial Law allows for property contributions into companies’ share capitals – whenever the value of a property contribution exceeds LVL 4000, it must be appraised by an appraiser or a company included in the Register of Enterprises list of approved experts; as a result, appraisals of real estate, movable property and other types of property one wants to use for a property contribution are performed by qualified specialists more often now.
  • For accounting and financial reporting – to determine the normal value according to the INTERNATIONAL ACCOUNTING STANDARDS.
  • To establish the value of property for buy/sell deals – despite the fact that the number of buyers and sellers of „sophisticated” property, such as factories, capital shares and stocks, who use the services of qualified appraisers to determine the value of property before making a deal is growing, the opinion that in case of a „simpler” property no appraisal is needed still prevails, for „the price is self-evident”, after all. One might want to add that this conviction is wrong, because a professional opinion will always be more objective and justified than a non-professional one. That is why, for example, in the United States appraisals are more often than not made for the seller to establish a justified price and for the buyer to ascertain that the price is adequate in the given market situation.