When receiving an equipment appraisal, it’s not uncommon for an owner to feel surprised—or even disappointed—by the final valuation. In many cases, this reaction comes down to one critical factor that is often overlooked:
The definition of value used in the appraisal.
Understanding how value is defined—and who the appraisal is intended for—can make all the difference in interpreting the results correctly.
Who Is the Appraisal Really For?
In many situations, the equipment owner is the intended user, but not the client.
For example, if a bank or lender requests the appraisal, they are the client, and their objectives shape the assignment. The appraiser is required to deliver an unbiased opinion of value based on the defined scope of work, the specified definition of value, and the intended use of the appraisal.
This means the final value is not simply a reflection of what the owner hopes the equipment is worth—it reflects the context in which the value is being determined.
Why Lenders Often Request Lower Value Scenarios
When a bank orders an appraisal, their goal is typically to understand the risk associated with the asset.
As a result, they often request valuations based on liquidation scenarios, which represent a more conservative estimate of value. These scenarios assume the equipment may need to be sold under less-than-ideal conditions.
Two of the most common definitions used are:
What Is Orderly Liquidation Value (OLV)?
Orderly Liquidation Value (OLV) is one of the most frequently requested value definitions in lending situations.
It is generally understood as the estimated amount that could be realized from the sale of equipment over a reasonable period of time, with the seller being compelled to sell on an “as-is, where-is” basis.
Key characteristics of OLV
- Assumes a planned and controlled sale process
- Allows for adequate marketing time
- Reflects market conditions and buyer availability
- Includes deductions for depreciation and obsolescence
- Includes dismantling, removal, and transportation costs
Typical timeline
For concrete-related equipment, the exposure period can often range from 9 to 12 months or longer. This longer marketing period generally supports a stronger sale outcome than a rushed process.
What Is Forced Liquidation Value (FLV)?
When time is limited, lenders may instead request a Forced Liquidation Value (FLV).
This is commonly understood as the estimated amount that could be realized from a properly marketed public auction, where the seller is compelled to sell quickly on an “as-is, where-is” basis.
Key characteristics of FLV
- Assumes a time-sensitive sale
- Typically involves a public auction
- Reflects a sense of urgency
- Includes auction costs, marketing expenses, commissions, and seller’s premiums
- Includes dismantling and removal costs
Typical timeline
The expected timeframe for a forced liquidation sale is often 3 to 6 months.
Because of the shorter exposure period and urgency involved, FLV is typically lower than OLV.
Why These Values Differ from Market Value
Many equipment owners expect an appraisal to reflect what the equipment could sell for under normal market conditions. However, liquidation values are not the same as standard market value.
- Liquidation values assume compelled sale conditions
- They prioritize speed and certainty over maximum price
- They may result in lower conclusions than an owner expects
This is why lender-requested appraisals can come in lower than anticipated.
What Equipment Owners Should Ask
If you receive an appraisal that seems lower than expected, start by asking:
What definition of value was used?
Understanding that answer will help you:
- Interpret the results correctly
- Align expectations with the purpose of the appraisal
- Determine whether another valuation premise may be more appropriate
Final Thoughts
The definition of value is one of the most important factors influencing any appraisal outcome. Without understanding it, even an accurate and well-supported valuation can be misinterpreted.
At iwi Valuation Services, we work closely with clients to ensure clarity around the purpose of the appraisal, the appropriate definition of value, and the methodology used to reach a conclusion.
This helps ensure that each valuation is not only accurate, but also meaningful within its intended context.
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