Often, when a CPA, broker or seller sees a Bargain Sale Appraisal of a property, there may be skepticism. Initially, his/her thought may turn to the potential of something just too good to be true. The result from not understanding the difference between how Bargain Sale valuations work and the traditional retail appraisal process is that many profitable transactions are not considered.

Understanding how Bargain Sale valuations work helps stakeholders realize deductions on tax liabilities.

 

Sellers lose opportunities for cash at closing and tax deductions, brokers don’t receive commissions, and nonprofits can’t benefit from the transaction when the proposal isn’t even considered due to lack of knowledge or at worse misinformation. With a better understanding of the Bargain Sale Appraisal method, participants may realize the valuation is good and true.

Importance for Understanding Bargain Sale

According to a 2013 article by the American Institue of CPAs, 88% of business decision-makers value their CPAs’ opinions. The article goes on to say ‘clients continue to acknowledge the CPAs’ lead in the core areas of tax, accounting, and audits’. This statistic shows how imperative it is for participants to understand the valuation process, especially the CPA. Therefore, if 88% of clients accept the advice of their CPAs, they have a significant influence in whether a Bargain Sale is considered.

The IRS Publication 561 outlines the necessary steps to complete a Bargain Sale, providing more information for stakeholders to gain trust in the appraisal process. Although the publication states that a qualified appraiser can complete the valuation process, Welfont uses an MAI-Designated appraiser because of the required credentials and experience.

In a recent interview with Welfont, Brad Pope, Former Managing Director of NAI Brannen Goddard, in Atlanta, GA, stressed the value of the appraisal process. “It is important that the appraiser knows about this kind of transaction, so he won’t give you one of the typical three appraisal methods:  income, replacement and market value.” Pope goes on to say that he sees how the Bargain Sale appraisal method gives the property a higher valuation. Click here to see the entire interview.

How Bargain Sale Valuations Work

To better understand the benefits of the Bargain Sale Appraisal, first, let’s see how it differs from a traditional property appraisal. Then, we’ll look a what it means to become an MAI-Designated appraiser. A traditional appraisal includes the following:

  • Any appraiser can perform the valuation process.
  • Considers the condition of the asset and its environmental issues.
  • Uses recent sales comps within a specific area.
  • Uses income methodology for similar assets within a specified area.

A Bargain Sale Appraisal shares some things in common with a traditional appraisal. However, its parameters are much more lenient:

  • Highest and Best Use is considered in addition to the current usage.
  • Sales comps from a much longer period are allowed if there are not recent sales, and from a larger area, if there are no “good” comps available in the region of the asset.
  • The appraisal is made under the assumption that neither Seller nor Buyer is under ANY compulsion to sell or buy.
  • The appraiser is allowed to assume there are an unlimited marketing budget and no time requirements for the sale.
  • Evaluators give replacement cost much more weight than a market valuation; more akin to an insurance appraisal.

The end effect is that a Bargain Sale appraisal can potentially result in a more generous valuation IF the property is part of a donation to a 501(c)(3) nonprofit.

Qualities of an MAI Appraiser

Although a qualified appraiser is allowed, Welfont chooses an MAI-Designated appraiser to perform a Bargain Sale Appraisal. The difference between a qualified appraiser and an MAI-Designated appraiser is the rigorous requirements to receive the designation. To become an MAI Appraiser, according to the MAI Institute, a person must have:

  • Have good moral character;
  • Meet standards and ethical requirements; Required to complete the Appraisal Institute Business Practices and Ethics course,
  • Pass rigorous education requirements;
    • Candidate must have received at least a four (4) year Bachelor’s Degree from an accredited degree-granting educational institution (or international degree equivalent for international Candidates).
    • General Appraiser Report Writing & Case Studies exam
    • Pass exam for Advanced Income Capitalization
    • Pass exam for Advanced Market Analysis & HBU
    • Successfully complete exam for Quantitative Analysis
    • General Comprehensive Examination
  • Specialized Experience Requirement; Must receive credit for 4,500 hours of specialized work.
  • Pass a final comprehensive examination;
  • Submit specialized experience which must meet a strict criterion;
  • Receive credit for the demonstration of knowledge requirement.

The MAI Institute also states that its designation program has a lengthy reputation with courts of law, government agencies, financial institutions, and investors.  Many financial institutions accept the MAI designation as excellence in real estate valuation and analysis. Some appraisers would say the designation is like having a Ph.D. in real estate appraisals. To read the requirements in their entirety, please visit the MAI Institute website.

Considering Bargain Sale Transactions

With an understanding of the Bargain Sale Appraisal method, stakeholders may consider Bargain Sale transactions as viable. By understanding the Internal Revenue Service process, brokers may realize comparable commissions after educating clients and financial advisors of the Bargain Sale’s approach to dispositions. While nonprofits won’t lose out on opportunities to pursue their charitable goals, the seller may receive higher tax deductions and cash at closing.

Welfont has a wealth of experience with the Bargain Sale. We can help provide answers for your specific property. We are the experts with over 10 million square feet of acquisitions in more than 30 states in the U. S. We are very familiar with the Bargain Sale Appraisal process. We can help you achieve the most in cash and tax deductions for your asset. If you would like more information, please visit our FAQ page or email us at info@welfont.com.

Written by Joseph Garnett, Jr. – Marketing Communications Specialist  – The Welfont Group, LLC