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Discussion of the Concept/Basis of Diminished Value:

The analysis made in Diminished Value Reports is based on information supplied to appraisers from various sources, the experience of the appraiser, market knowledge, and the appraiser’s training. In making any Diminished Value inquiry, the appraiser upon the principle of antecedent probability, i.e.; one may rely upon consistent past events to reliably predict the future. Appraisers also rely upon the fact that while there are most often similar undamaged items in the marketplace, there are almost never similar items that are identical once repaired. This creates the hypothetical nature of diminished value appraisal reports, and where the experience, training, education and market knowledge of the appraiser is particularly important.

Appraisers offer opinions as to value while courts set value. Appraiser’s opinions are communicated in written reports, depositions, and testimony. In their search for value determination, appraisers often act as expert witnesses and as such are allowed and expected to offer opinions based upon theory, fact, experience, and observation. However, these opinions are expected to conform to recognized economic and appraisal theory and practice. This is established in judicial precedent set forth in Daubert v Merrill Dow Pharmaceutical, Inc. (1993) and a similar case, Kumho.

All values herein stated assume that all parties are aware of all the relevant facts concerning an item, the market, and all other pertinent information. It is true that some items can be sold, such as at auction, where all the relevant facts about an item are not known, such as hidden and undisclosed damage and injury. However, this does not fall under the definition of fair market value, which is one of the basic underpinnings of fair dealing and a necessary part of any valuation. Both fair market value and Fair Market Value rely on the principle that all parties are aware of all the relevant facts.

Diminished Value reports express an opinion of the impairment of merchantability/salability of an item resulting from damage. A repaired or un-repairable item is, almost without exception, recognized by the market as such, a item of diminished value, and is, even if repaired, to some extent inferior, or of less quality, and therefore of less value. The result is, with some differences, that the market will discriminate against the damaged/repaired items and is prejudiced against such items, to varying degrees, depending on a variety of factors. The market reacts to damage to an item almost invariably by dropping an item’s ranking within its class. The market’s negative reaction causes an equal and corresponding drop in the value of a repaired item or an item, which is un-repairable. Items that have been damaged and repaired, often times, loose their collectible status and become objects of common use. This is because, once damaged, they enter the marketplace “as repaired,” rather than “as manufactured.” There are no set fixed formulas for estimating the diminution of value, but there are reoccurring issues that collectively affect the value of items that have been repaired.

There is no question that the severity, location, intrusiveness, type, reparability and the obviousness of the repair/damage as well as other tangible and intangible changes to the item caused by the repair/damage affect the manner in which the market reacts to an item that has been damaged and then repaired or is, for whatever reason un-repairable. An example of this would be: that damage to the underside of a table that could be repaired in a non-conspicuous manner and is not obvious to people seeing the table would affect a loss in value that would be less than a table that was similarly damaged on the top and when repaired the fix/repair would be obvious to all who view the table. This same tenet holds true for items, which have been damaged, but for which damage there is no suitable repair. Another important example is the breakage into two pieces of a plate of collector quality contemporary china and how this breakage would affect its value. Even if this item were to be professionally repaired the value of the repaired piece may be as low as 10% – 40% of a non-damaged similar piece of the same china. Damage can be ranked and graded, by knowledgeable individuals, as to the damage’s estimated effect on the post-damage value of the item. Repair, even proper repair, will not restore an item’s value. The effect that damage has on an item’s value can be estimated, analyzed, evaluated and determined in approximate numbers.

Diminished Value Defined (Estimate of Loss); For the purposes of this appraisal report “Diminished Value” shall mean the amount of an item’s value which is not recoverable through a repair process or by other means and is measured as the difference between the before damage and after damage value of an item. Some of the various factors that can impact this are:
Antiquity or age of the item,
The pre-damaged and post-damaged condition of the item,
Beginning originality of the item,
Pre-accident value,
Pre-damage and post-damage item’s desirability and qualitative ranking within its class with an analysis of the item’s post-repair value characteristics, and subsequent ranking within its class,
Pre-damage and post-damage item’s collectability,
Pre-damage and post-damage item’s value category (high, low, medium),
Location of the damage,
The extent and nature of the damage and subsequent repair, e.g., replaced parts, (This is particularly important when dealing with the repair of items using non-original factory parts, when original equipment parts are available.)
Item’s loss of usability, functionality and physicality of the item, if any,
A reduction in collectability,
Market acceptability,
Market desirability,
A perceived reduction in quality, and integrity, (Especially, if inferior parts are used in the repair, or if it is perceived that there is a likelihood that inferior parts were used in the repair.)
A diminishment of an owner’s confidence in a particular item, e.g., reliability, worthiness,
A lessening of the intrinsic status of an item, a diminishment of an item’s desirability, and/or other fundamental characteristics, etc.,
An item’s drop in class ranking,
The overall psychological effect of knowing that an item is “damaged” merchandise,
Change in the item’s beauty/attractiveness/character/modality,
Whether the item can be properly repaired (items that have been damaged and for which repair is impossible or inadvisable can have their devaluation intensified and accelerated),
The eventual obviousness and intrusiveness of the repair, if possible, e.g., the shrinkage of wood putty once a repair of this type has dried and aged, different rates of change regarding age and the resulting differences in patina, quality and execution of the repair, slight changes in paint pigmentation and color,
The extent the damage and/or repair negatively impacts prospective buyers and the marketplace: marketplace reaction to the repair, all of these issues and inter-related relationships are especially important and have a heightened affect on the value of an item that cannot be repaired after suffering damage.
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In theory, diminished value has two facets: tangible and intangible. Tangible issues address physical damages that are sometimes but not always repairable and to what extent the repairs affect an item’s:
• Usability,
• Functionality,
• Visual or physical attributes of the item, etc.
Intangible issues address those issues that impact an item’s value but are not necessarily physical or visible, e.g.,
• Limited editions,
• Provenance,
• Collectability,
• Rarity factor,
• Market acceptability,
• An item’s perceived integrity/quality,
• Confidence in an item being mechanically sound,
• Confidence in an item’s reliability,
• Reduction in the perceived worthiness of an item and/or drop in class ranking and in prestige within its class,
• Reduction in the pride of ownership and the psychological effect of knowing that the item is “damaged” goods,
• Desirability,
• Aesthetics, and/or other inherent characteristics, etc.
Damage both tangible and intangible causes a real, but perhaps immeasurable, reduction in an item’s overall ranking. It is assumed that all repair work, when performed, is of the highest professional standard.

Markets dislike uncertainty and ambiguity, and damage and subsequent repair creates uncertainty and unanswered questions. Some of the unanswered questions are admittedly unanswerable. Damage, especially structural damage, negatively stigmatizes, because of the uncertainty created by the damage and repair, repaired items. It is this stigmatization that is one of the primary root causes of diminished value, and why it is inescapable in the marketplace.

Diminished Value Formula Explained: The process of estimating the dollar amount of impaired salability/merchantability is grounded in ‘a posteriori’ reasoning, which is derived by the process of reasoning from facts or particulars to general principles or from effects to causes; inductive, empirical. This loss of merchantability is measured in the marketplace based on issues, which, under full disclosure, are logical and easily understood.

Tangible Diminished Value Formula (Repaired):
$14000.00 Pre-accident Value
–$ 9000.00 Post-accident Value
——————
$ 5000.00 Loss due to accident/damage

 

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