An appraiser by any other name: the differences between real estate and business appraisers.

AN APPRAISER BY ANY OTHER NAME

The Differences between Real Estate and Business Appraisers

Like so many other professions, the need for specialists in the appraisal field is an absolute necessity. Real estate appraisers have the necessary real estate background and training to do real estate appraisals. Similarly, business appraisers have the requisite business credentials and financial training to do business appraisals. While they share some common appraisal standards, the professional disciplines and the required knowledge differ.

Real estate appraisers, unless otherwise certified, do not have the specialized knowledge, experience, credentials, and training in finance, accounting, securities, tax law, and so forth to perform business appraisals. Likewise, business appraisers, unless otherwise certified, do not have the requisite knowledge, experience, credentials, and training in residential and commercial properties (homes, office buildings, warehouses, and so on) to perform real estate appraisals.

The S&L bail-out bill has resulted in state-by-state licensing of real estate appraisers. The term used to designate a licensed real estate appraiser in many states is "Certified General Appraiser." This term may cause some confusion. After all, who should appraise real estate and who should appraise businesses? And what are the basic differences?

Professional Disciplines

In the real estate discipline, the appraiser deals in the valuation of land, improvements, and associated rights. Business appraisal/valuation, on the other hand, deals with the value of the rights inherent in ownership of a commercial, industrial, or service organization pursuing an economic activity.

A real estate appraiser should have detailed knowledge of real estate appraisal research and analysis techniques; real estate appraisers must be more or less conversant with the fields of building, civil engineering, architecture, surveying, forestry, soil science, agriculture, accounting, real estate brokerage, lending, urban land economics, government real estate regulations, and real estate law (from What Appraisers Do, a 1989 report prepared for the Wisconsin Legislature by the Wisconsin Appraisers Coalition).

The business appraisal discipline draws heavily on the theory and practice of corporate finance and securities analysis in addition to the requisite understanding of economics, business management, and accounting. The umbrella labeled "corporate finance" really covers the financing of all kinds of business entities, regardless of whether they happen to be corporations, partnerships, or sole proprietorships. The basic focus of business appraisal is the appraisal of an interest in an operating entity.

Do You Require a Business or Real-Estate Appraisal?

The checklist will help determine which type of appraiser to consult. "Yes" answers indicate that business appraisal qualifications and credentials are required. "No" answers indicate that real estate qualifications and credentials are required. A mix of "yes" and "no" answers indicates that both disciplines may be required for the appraisal. (The checklist is abstracted from an article by John D. Emory, "Why Business Valuation and Real Estate Appraisal Are Different," Business Valuation Review: American Society of Appraisers [March 1990].)

Application of this checklist should generally dispel any confusion as to the basic nature of the subject being appraised and the credentials required to perform the appraisal.

Richard Houlihan, CPA, ASA, is an accredited senior appraiser with the firm of Houlihan, Dorton, Jones, Nicolatus & Stuart.