What Is an Appraisal Management Company (AMC)?

An Appraisal Management Company (AMC) is an independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans to homebuyers.

AMCs fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender. Individual appraisers who work for AMCs provide the actual property valuation services.

Understanding Appraisal Management Companies (AMC)

AMCs have been a part of the real estate landscape for the past 50 years. However, their numbers remained limited until the financial crisis of 2007 to 2008.

In 2009, the New York Attorney General, government-sponsored enterprises Freddie Mac and Fannie Mae, and the Federal Housing Finance Agency (FHFA) established the Home Valuation Code of Conduct (HVCC) appraisal guidelines. The HVCC guidelines, no longer on the books, laid the foundation for the appraiser independence found in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act. Laws obligating lenders to use independent appraisers led to a sharp rise in the use and number of AMCs.

The HVCC and later federal regulation sought to limit the amount of direct contact that lenders could have with appraisers. Essentially, the U.S. federal government created appraiser independence requirements to prevent lenders from influencing appraisers to inflate property values, a problem believed to have contributed to the housing crisis.

With an AMC, mortgage brokers, loan officers, nor homeowners may select the appraiser for the property on which they want to lend/borrow funds. Since the former parties have a financial interest in the transaction, there is a risk they might attempt to influence the appraiser to assign a higher value to the property than market conditions support so the transaction will go through.

Appraisal Management Company (AMC) Requirements

AMCs maintain a pool of state-licensed or state-qualified appraisers to meet requests from lending institutions. An appraiser is then assigned to provide an appraisal report for the property.

AMC appraisers are not provided with any prior information regarding the property or put in contact with the lending institution. The appraiser’s assessment must meet the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. If there are any issues, the AMC can legally assist.

What Does Accredited in Business Valuation Mean?

Accredited in Business Valuation (ABV) is a professional designation awarded to a certified public accountant (CPA), who specializes in calculating businesses’ value. The ABV certification is overseen by the American Institute of Certified Public Accountants (AICPA). It requires candidates to complete an application process, pass an exam, meet the minimum business experience and education requirements, and pay a credential fee. As of 2021, the annual fee for the ABV Credential was $380.

Maintaining the ABV credential also requires those who hold the certification to meet minimum work experience standards and lifelong learning. Successful applicants earn the right to use the ABV designation with their names, improving job opportunities, professional reputation, and pay.

How Accredited in Business Valuation Works

The Accredited in Business Valuation credential is awarded to CPAs who demonstrate considerable knowledge, skill, and business valuation experience. The study program to become an ABV covers the basic business valuation process, professional standards, qualitative and quantitative analysis, valuation analysis, and other related topics, such as financial reporting and litigation.

Accredited in Business Valuation Requirements

Candidates seeking ABV accreditation must have a valid (and unrevoked) CPA license or certificate issued by the appropriate state authority. They must also pass the ABV Examination, with some exceptions. For example, this requirement is waived in the case of AM (Accredited Member of the ASA) and ASA (Accredited Senior Appraiser) credential holders of the American Society of Appraisers, CFA (Certified Financial Actuary) holders, and CBV (Chartered Business Valuator) credential holders of the Canadian Institute of Chartered Business Valuators.

Every three years, ABV professionals must complete 60 hours of continuing professional education. They must also pay an annual fee of several hundred dollars.

Business Experience and Education Requirements For Candidates

Business Experience

ABV candidates must have obtained a minimum of 150 hours of BV experience within the five years preceding the credential application date. Candidates may also apply a maximum of 15 experience hours by completing the hands-on business valuation case study track at the AICPA Forensic and Valuation Services Conference.

Education Requirement

ABV candidates must complete 75 hours of valuation-related continuing professional development (CPD). All hours must be obtained within the 5-year period preceding the date of the ABV application.

Accredited In Business Valuation Exam

The ABV Exam is conducted by computer and consists of two parts. Both parts must be passed in 12 months (based on passing the first part) to receive ABV credit.

Applicants are given three hours and 15-minutes to complete each section of the test, including a 15-minute break. The exam consists of 90 multiple-choice questions per module, and much of the exam are discrete multiple-choice questions (78 in total). A dozen questions are case studies with accompanying multiple-choice answers. These questions are meant to test a candidate’s analytical aptitude and apply valuation theory and methodology.

What is Asset Valuation?

Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or comparables. Such assets include investments in marketable securities such as stocks, bonds and options; tangible assets like buildings and equipment; or intangible assets such as brands, patents and trademarks.

Understanding Asset Valuation

Asset valuation plays a key role in finance and often consists of both subjective and objective measurements. The value of a company’s fixed assets – which are also known as capital assets or property plant and equipment – are straightforward to value, based on their book values and replacement costs. However, there’s no number on the financial statements that tell investors exactly how much a company’s brand and intellectual property are worth. Companies can overvalue goodwill in an acquisition as the valuation of intangible assets is subjective and can be difficult to measure.

Net Asset Value

The net asset value – also known as net tangible assets – is the book value of tangible assets on the balance sheet (their historical cost minus the accumulated depreciation) less intangible assets and liabilities – or the money that would be left over if the company was liquidated. This is the minimum a company is worth and can provide a useful floor for a company’s asset value because it excludes intangible assets. A stock would be considered undervalued if its market value were below book value, which means the stock is trading at a deep discount to book value per share.

However, the market value for an asset is likely to differ significantly from book value – or shareholders’ equity – which is based on historical cost. And some companies’ greatest value is in their intangible assets, like the findings of a biomedical research company.

Absolute Valuation Methods

Absolute value models value assets based only on the characteristics of that asset. These models are known as discounted cash flow (DCF) models, and value assets like stocks, bonds and real estate, based on their future cash flows and the opportunity cost of capital. They include:

• Discounted dividend models, which value a stock’s price by discounting predicted dividends to the present value. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued.
• Discounted free cash flow models calculate the present value of future free cash flow projections, discounted by the weighted average cost of capital.
• Residual income valuation models consider all the cash flows that accrue to the firm post the payment to suppliers and other outside parties. The value of the company is the sum of book value and the present value of expected future residual income. Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.
• Discounted asset models value a company by calculating the present market value of the assets it owns. As this method does not take into account any synergies, it’s only useful for valuing commodity businesses like mining companies.

Relative Valuation & Comparable Transactions

Relative valuation models determine the value based on the observation of market prices of similar assets. For example, one way of determining the value of a property is to compare it with similar properties in the same area. Likewise, investors use the price multiples comparable public companies trade at to get an idea of relative market valuations. Stocks are often valued based on comparable valuation metrics such as the price-to-earnings ratio (P/E ratio), price-to-book ratio or the price-to-cash flow ratio.

This method is also used to value illiquid assets like private companies with no market price. Venture capitalists refer to valuing a company’s stock before it goes public as pre-money valuation. By looking at the amounts paid for similar companies in past transactions, investors get an indication of an unlisted company’s potential value. This is called precedent transaction analysis.

Real World Example of Asset Valuation

Let’s work out net asset value for Alphabet Inc. (GOOG), the parent company of search engine and advertising giant Google.

All figures are for the period ending Dec. 31, 2018.

• Total assets: $232.8 billion
• Total intangible assets: $2.2 billion
• Total liabilities: $55.2 billion

Total net asset value: $175.4 billion (total assets $232.8 billion – total intangible assets $2.2 billion – total liabilities $55.2 billion)