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Be Wary of Windshield Appraisals

When you need to know the value of your business or property, it’s tempting to settle for a quick-and-dirty method of assigning value commonly known as a “windshield appraisal.” A windshield appraisal, however, is not the same thing as a full appraisal. While its lower upfront price tag can be appealing, it can eventually cause costly problems if it’s insufficient for your needs.

This potential for problems becomes evident when reviewing the recent U.S. District Court Case of TCF National Bank v. Market Intelligence, Inc. et al. Although this case involves the appraisal (or perhaps more accurately, non-appraisal) of real property, its lessons can be applied to business appraisals as well.

In this case, TCF hired Market Intelligence to perform a less-expensive alternative to appraisals, known as Field Asset Verification (FAV), for use in its consumer lending activities in Minnesota. When real estate prices began to appreciate, borrowers came to TCF to refinance their loans. Refinancing these loans, of course, required full appraisals. Once the appraisals were complete, TCF found significant discrepancies between FAV and appraisal values for many properties, and, as you might have guessed, FAV values were consistently higher. This meant that TCF had issued loans secured by mortgages that were significantly higher than property values, which ultimately led to foreclosures and abandoned property. By the time TCF cancelled its contract with Market Intelligence, TCF had ordered 2,989 FAVs that were used to initiate loans totaling $300 million.

The arguments of the case focused primarily on the work that Market Intelligence performed, and what was involved in the FAV process. TCF argued that the FAVs were to be reviewed by qualified real estate analysts and appraisers, but that Market Intelligence failed to satisfy this requirement. Nonetheless, the agreement between TCF and Market Intelligence distinguished between appraisals and other products. In the excerpt below, note the use of the term “evaluation” rather than “valuation”—a distinction in and of itself.

Evaluation shall mean the act or process of estimating value; an estimate of market value of residential real estate based upon some or all of the following: information obtained from TCF and/or the owner of the subject property, available public records, available market data, and/or a field inspection conducted by a real estate professional who may or may not be an appraiser. Evaluations are not appraisals and do not necessarily comply with USPAP . . .  While these estimates of market value are derived from sources that MI believes to be reliable, in no case does MI represent or warrant that an evaluation represents actual market value.

Ultimately the Court granted Market Intelligence’s motion for summary judgment due to expiration of the statute of limitations. However, had TCF opted for full appraisals in the first place, it might have avoided subsequent issues.

The lessons learned from this case can easily be applied within the realm of business valuations. There are different types of business appraisals or valuation opinions that can be used to satisfy various needs and situations. In fact, a windshield appraisal could be the right product for your situation, especially if you simply need a ballpark figure for planning purposes. Nevertheless, a windshield appraisal is really a “non-appraisal.” As such, it may result in a different opinion of value than a full appraisal, and it may not hold up in court if your situation ultimately requires expert testimony.

Furthermore, a windshield appraisal does not require the same stringent credentials as a full appraisal. This means an individual without the appropriate experience or qualifications could be permitted to do the work. So when it comes to something as critical as the value of your business, don’t cut corners. Always choose an experienced, credentialed business valuation professional to perform any type of valuation work.  

If you have questions or would like to discuss this topic further, please don’t hesitate contact a member of our Business Valuation and Litigation Support Team.

Andrew Brower, MBA, ASA, is a member of AEM’s Business Valuation and Litigation Support Team. He specializes in preparing business valuations of closely held businesses for purposes ranging from marital dissolution to buy-sell agreements. You can reach Andrew at 952.449.6234 or at andrew.brower@aemcpas.com.

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