	Estimating Net Worth: One Organization's Search for Truth (This article was initially published in the Winter 1998 issue of the official publication of the Virginia APRA.) Several months ago, the Research Department here at the University of Virginia decided to take a closer look at how we estimated an individual's net worth. Although many in our field will agree that an accurate determination of net worth is impossible (and some believe futile), here at Virginia we find it to be a necessary step in our attempts to segregate our exceptionally large database of prospects. By calculating potential gift capability based on the total known assets of an individual, we are able to assign to each a rating, ranging from $10,000 to $10 million plus. These ratings then allow us provide a more selective solicitation strategy that is appropriate to the gift range into which each prospect falls. For several years prior we relied upon two very straightforward formulas to arrive at these ratings. If stockholdings were an individual's largest asset, the following would apply: Total known direct stock holdings x (1-3) = estimated net worth 5% of estimated net worth = estimated gift capability We felt comfortable with this formula. By using a multiplier of anywhere from 1 to 3, the researcher was able to use her/his discretion as to how many unknown assets the prospect probably owned. If we believed that we had found the majority of an individual's assets, we multiplied his/her holdings by a lower number. If we felt that what we had found was just the tip of the iceberg (i.e., the prospect was a private investor), we applied a multiplier of 3. We chose to leave this formula as it was. The problem, in our eyes, was in determining a prospect's net worth based solely on his/her real estate holdings. Our old formula for this situation was as follows: Total real estate holdings x 5 = estimated net worth 5% of estimated net worth = estimated giving capability While we felt that we were getting fairly accurate numbers for individuals with large real estate holdings, we believed that those with houses assessed at lower values were receiving disproportionately high ratings. Can a Professor of Architecture with a $200,000 house really afford a gift of $50,000? In an effort to discover how our formulas for arriving at net worth compared to our colleagues around the country, we posted a query on PRSPCT-L. The results were quite varied and included the following: 20 x level of consistent annual giving = giving ability (over 5 year period) 10% of annual income = giving ability (over 5 years) .5% - 1.5% of liquid assets = giving ability 5% of total known assets (real estate + stock holdings + annual income for 5 years) = giving ability (5 years) However, after applying these formulas to examples from our database, we found that none of the above were truly feasible for us. Unless our prospect was listed on a proxy, we usually did not have his/her annual income or stockholdings. In fact, 75%-80% of the time, real estate holdings are our only source on which to base our estimates. So we turned in a different direction. By far the most popular source recommended to us for determining net worth was an article by Rob Millar, Director of Development Services at Boston College, entitled, "How Much is That Donor in Your Records?" (Case Currents, July/August 1995). The solution provided in this article was attractive to us for a number of reasons. To begin, it suggests a formula based upon statistical averages obtained from the Internal Revenue Service. Compiled into percentage tables, these averages represent a breakdown of total assets drawn from tax returns for deceased individuals with estates of $600,000 or higher in 1989. This study determined what percentage each asset was of the total net worth of the estate, on average. Different percentages are also provided for estates of varying sizes. To use the tables, you simply plug in the asset you are working with and calculate a net worth. Here is an example ... you know that your prospect has real estate valued at $200,000. Looking at the table, you see that for an individual whose estate falls between $600,000 - $1 million, real estate will, on the average, comprise 27.6% of his/her overall wealth. If $200,000 is 27.6% of your prospect's wealth, then she/he has an estimated net worth of $724,638 ($200,000 / .276). But once again, after applying several case studies from our database to these tables, we found that our initial problems remained unresolved. While the estimates obtained from this table initially seemed reasonable, it made no provision for individuals with estates of less than $600,000, a category into which a number of our prospects fell. Also, we were bothered by the fact that the table was based upon statistics from 1989. The Dow Jones Index has quadrupled since 1989, a fact that could dramatically alter the average amount of an individual's stockholdings in relation to his/her overall wealth. This, alone, was enough to make us wary. In the end, we chose to improvise. Because our estimates for wealthier individuals were comparable if not conservative to those arrived at by several of the formulas used by other institutions, we decided to address only the issue of prospects with lower real estate holdings. The University of Virginia, currently in a capital campaign, is focusing its efforts on major gift prospects (gifts of $100,000 and above). We therefore drew the line at real estate holdings of $400,000 and above. Those falling in this category, based upon our old formulas (5 x real estate = net worth and 5% of net worth = gift capability), were qualified as major gift prospects, and we felt fairly confident of their capability to give. We took a closer look at our prospects that fell below the $400,000 mark. We compared the original ratings that we had assigned to these prospects based upon real estate to the actual amounts they eventually gave. We decided that our best alternative would be to lower our multiplier to 3 for those with property totaling less than $400,000: Total real estate holdings x 3 = estimated net worth 3% of estimated net worth = estimated giving capability These figures presented a much more accurate reflection of wealth and ability at this level than our previous numbers. It was a long journey, but an important one. Although estimating net worth for individuals is still a nebulous practice at best, it is still a necessary one for many organizations. The solution ultimately adopted by the University of Virginia will undoubtedly not be appropriate for all, but I hope that our process of reaching it will prove helpful and informative to those of you who are facing similar challenges. *Published by:* *Angela Vaughan, Senior Development Researcher* *University of Virginia* *January 1998*

Estimating Net Worth:
One Organization's Search for Truth

(This article was initially published in the Winter 1998 issue of the official publication of the Virginia APRA.)

Several months ago, the Research Department here at the University of Virginia decided to take a closer look at how we estimated an individual's net worth. Although many in our field will agree that an accurate determination of net worth is impossible (and some believe futile), here at Virginia we find it to be a necessary step in our attempts to segregate our exceptionally large database of prospects. By calculating potential gift capability based on the total known assets of an individual, we are able to assign to each a rating, ranging from $10,000 to $10 million plus. These ratings then allow us provide a more selective solicitation strategy that is appropriate to the gift range into which each prospect falls.

For several years prior we relied upon two very straightforward formulas to arrive at these ratings. If stockholdings were an individual's largest asset, the following would apply:

Total known direct stock holdings x (1-3) =
estimated net worth

5% of estimated net worth =
estimated gift capability

We felt comfortable with this formula. By using a multiplier of anywhere from 1 to 3, the researcher was able to use her/his discretion as to how many unknown assets the prospect probably owned. If we believed that we had found the majority of an individual's assets, we multiplied his/her holdings by a lower number. If we felt that what we had found was just the tip of the iceberg (i.e., the prospect was a private investor), we applied a multiplier of 3. We chose to leave this formula as it was.

The problem, in our eyes, was in determining a prospect's net worth based solely on his/her real estate holdings. Our old formula for this situation was as follows:

Total real estate holdings x 5 =
estimated net worth

5% of estimated net worth =
estimated giving capability

While we felt that we were getting fairly accurate numbers for individuals with large real estate holdings, we believed that those with houses assessed at lower values were receiving disproportionately high ratings. Can a Professor of Architecture with a $200,000 house really afford a gift of $50,000?

In an effort to discover how our formulas for arriving at net worth compared to our colleagues around the country, we posted a query on PRSPCT-L. The results were quite varied and included the following:

20 x level of consistent annual giving =
giving ability (over 5 year period)

10% of annual income =
giving ability (over 5 years)

.5% - 1.5% of liquid assets =
giving ability

5% of total known assets
(real estate + stock holdings + annual income for 5 years) =
giving ability (5 years)

However, after applying these formulas to examples from our database, we found that none of the above were truly feasible for us. Unless our prospect was listed on a proxy, we usually did not have his/her annual income or stockholdings. In fact, 75%-80% of the time, real estate holdings are our only source on which to base our estimates.

So we turned in a different direction. By far the most popular source recommended to us for determining net worth was an article by Rob Millar, Director of Development Services at Boston College, entitled, "How Much is That Donor in Your Records?" (Case Currents, July/August 1995). The solution provided in this article was attractive to us for a number of reasons.

To begin, it suggests a formula based upon statistical averages obtained from the Internal Revenue Service. Compiled into percentage tables, these averages represent a breakdown of total assets drawn from tax returns for deceased individuals with estates of $600,000 or higher in 1989. This study determined what percentage each asset was of the total net worth of the estate, on average. Different percentages are also provided for estates of varying sizes. To use the tables, you simply plug in the asset you are working with and calculate a net worth.

Here is an example ... you know that your prospect has real estate valued at $200,000. Looking at the table, you see that for an individual whose estate falls between $600,000 - $1 million, real estate will, on the average, comprise 27.6% of his/her overall wealth. If $200,000 is 27.6% of your prospect's wealth, then she/he has an estimated net worth of $724,638 ($200,000 / .276).

But once again, after applying several case studies from our database to these tables, we found that our initial problems remained unresolved. While the estimates obtained from this table initially seemed reasonable, it made no provision for individuals with estates of less than $600,000, a category into which a number of our prospects fell. Also, we were bothered by the fact that the table was based upon statistics from 1989. The Dow Jones Index has quadrupled since 1989, a fact that could dramatically alter the average amount of an individual's stockholdings in relation to his/her overall wealth. This, alone, was enough to make us wary.

In the end, we chose to improvise. Because our estimates for wealthier individuals were comparable if not conservative to those arrived at by several of the formulas used by other institutions, we decided to address only the issue of prospects with lower real estate holdings. The University of Virginia, currently in a capital campaign, is focusing its efforts on major gift prospects (gifts of $100,000 and above). We therefore drew the line at real estate holdings of $400,000 and above. Those falling in this category, based upon our old formulas (5 x real estate = net worth and 5% of net worth = gift capability), were qualified as major gift prospects, and we felt fairly confident of their capability to give.

We took a closer look at our prospects that fell below the $400,000 mark. We compared the original ratings that we had assigned to these prospects based upon real estate to the actual amounts they eventually gave. We decided that our best alternative would be to lower our multiplier to 3 for those with property totaling less than $400,000:

Total real estate holdings x 3 =
estimated net worth

3% of estimated net worth =
estimated giving capability

These figures presented a much more accurate reflection of wealth and ability at this level than our previous numbers.

It was a long journey, but an important one. Although estimating net worth for individuals is still a nebulous practice at best, it is still a necessary one for many organizations. The solution ultimately adopted by the University of Virginia will undoubtedly not be appropriate for all, but I hope that our process of reaching it will prove helpful and informative to those of you who are facing similar challenges.

Published by:

Angela Vaughan, Senior Development Researcher
University of Virginia
January 1998

Estimating Net Worth: One Organization's Search for Truth

Estimating Net Worth:
One Organization's Search for Truth