Although LOV technically requires completed repairs to be credible, insurers often ask for anticipated loss-on-value before proceeding with restoration. In these cases, the appraiser must incorporate a hypothetical condition and extraordinary assumption(s). The 2024 Edition of the Uniform Standards of Professional Appraisal Practice defines a hypothetical condition as “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.” A comment further states, “Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property.” According to Standard 8-2(a)(xiii), the content of the Appraisal Report must clearly and conspicuously state all extraordinary assumptions and hypothetical conditions; and state that their use might have affected the assignment results.
USPAP requires that:
- The report clearly states it is based on a hypothetical condition,
- The appraiser discloses all extraordinary assumptions (e.g., that the repair will be professionally executed), and
- The report notes that these assumptions may affect the assignment results.
This disclosure is critical for USPAP compliance. Note that you may have several extraordinary assumptions depending on the type of property and the circumstances of the assignment.
Examples in Practice
- A painting’s asking price is $50,000 at a gallery. After a tear is repaired, the same painting is reduced to an asking price of $40,000. This represents a $10,000 / 20% LOV.
- A 19th-century grandfather clock valued at $5,000 is repaired after damage. If a buyer will only pay $3,800 post-repair, the LOV is $1,200 / 24%.
- A chipped diamond may need to be recut to remove the chip, potentially losing carat weight in the process. For example, if a diamond weighing 1.40 carats is recut to 1.30 carats (losing 0.10 carat), the LOV would be the difference between the replacement value of the original 1.40-carat diamond ($5,000) and the replacement value of the recut 1.30-carat diamond ($4,400). In this example, the LOV is $600, or 12%.
Repair Cost vs. LOV
Although repair cost does not determine LOV, it can influence insurer decisions.
For example:
- If RV before the loss is $10,000 and RV after repair is $9,000, LOV is $1,000.
- If repair costs $4,000, the insurer may choose repair plus LOV ($5,000 total) over cashing out at $10,000 (the full replacement value).
- However, if the appraiser determines RV is $10,000 but that the anticipated RV after repair is only $4,000, then the anticipated LOV will be $6,000.
- Instead of paying $3,000 for the repair and $6,000 for the LOV ($9,000 total), the insurer may determine that the risk of repair and a good outcome is not worth the $1,000 savings. In that instance, the insurer may cash out the client for the full RV before the loss ($10,000).
Conclusion
Loss-on-value is ultimately about market perception, not repair cost or restoration effort. While the mathematics are straightforward, the analysis is nuanced and requires careful market research and compliance with USPAP disclosure requirements. The most defensible LOV conclusions are those grounded in real market behavior and communicated with clarity and transparency.