The problem with litigation involving value opinions is that there is a tendency among lawyers and courts to try to make a “fact” out of an opinion. Further, for litigation and tax purposes, lawyers, courts, and the IRS typically demand a single value, and cannot deal with the reality that an appraiser’s opinion is in fact merely the most probable value on a probability curve of possible values, and that the probability is based upon certain assumptions.
In the Pension Protection Act of 2006, the federal government addresses this somewhat by requiring that a qualified appraiser have at least two years experience in appraising the type of property involved. Though this can open the door to many arguments, it does acknowledge that part and parcel of an appraiser’s opinion is the level of credibility of the appraiser based upon his experience.
We will comment on each case we review separately, and try to offer some suggestions for increasing the defensibility of appraisals. But in general we have observed a few basic rules which will enhance your position in court.
- The appraisal should be defensible, and resonate with people from a common sense, plain language point of view. It should not overcomplicate the issues with abstruse language or concepts.
- The appraisal should list everything that was considered -- especially things that were considered and rejected as not being appropriate or relevant. This is important in trying to understand the appraiser’s reasoning and basis for his opinion and the completeness of his investigation.
- The appraiser should not try to dazzle the reader with complicated analysis tools typically taught in business schools, and which may not really be appropriate to the case. An example is the use of discounted cash flows, which can change values dramatically with minor changes in assumptions – all of which are hypothetical if based upon projections. They are very easy to attack unless clearly identified as “hypothetical” (also required under USPAP). Opinions based upon a hypothetical are by their very nature less persuasive than those based upon observed facts.
- The appraiser should not try to base an opinion on “studies” which do not directly relate to the property being appraised. An example is the use of studies based upon stocks of public companies being used to defend values for closely held companies or securities for which there is no public market.
- In general, an appraisal should tell a complete story. It should start with a discussion of the situation, establish the relevant facts, determine the significance of the facts as it affects value, and come to a defensible conclusion. It is often the incompleteness of the defensible conclusion that leads to a loss.
