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Reflecting the Market

Published On 06-05-2013 , 5:21 PM

Much of appraising involves research: research into market trends and neighborhood influences on the subject property, research of the subject’s historical transactions and current marketing status, research into the maintenance record of the property, inspection research, research to find comparable sales and rents, research and more research. But there are times that even further research is needed. There are assignments were an additional level of research is required.


We may not always think about it this way, but the additional research that a particular assignment may trigger is a direct result of our mandate to reflect the market. The mechanics and analyses of appraising are highly complex. Valuation involves a lot of moving parts. But all of an appraiser’s activities can be boiled down to one goal: reflect the market. When appraising for a financial institution with the FIREA definition of Market Value as the foundational component, a value-in-exchange is one that mimics as closely as possible the actions and expectations of market participants.


Reflect the market; this is a fairly straight-forward concept that can be harder to put into practice than its innate simplicity would suggest. I have found that there are two main reasons why appraisers fail to do the additional research that would reflect the actions and expectations of market participants.


1.      Client Instructions: No short-cuts or abbreviations of reporting requested by the client can overcome an appraiser’s responsibility to establish his own scope of work, one that he determines will create a credible report that is not misleading.

2.      Data Not Provided: There are other times when the client or the borrower – for reasons only they know – neglect to provide the appraiser with some or all of the information needed to appraise the property. Without this crucial information, the delivered report is often misleading and rarely credible.


There are a variety of ways these two problems can play out in real world situations.


Leases: a leased property that is valued without benefit of the leases. Perhaps a rent roll is provided to the appraiser. Sometimes the terms and conditions of the lease or leases are relayed in a conversation with the borrower, who insists he does not have time to locate and make copies of the leases themselves. When the appraiser accepts these prevarications and completes the report, the property’s leased fee interest is valued without benefit of the lease contracts, which certainly has the potential of creating a misleading report.


More than Real Estate: a property type that is bought and told based on TAB, and not real estate alone, is valued without benefit of historic operating statements. Hotels, convenience stores, refineries, franchised fast food restaurants, these and other property types are sold as operating properties, which operations include personal property and intangibles in the purchase prices for the very reason that the market intends to purchase a business and not just real estate. It is particularly important that the scope of work for these assignments reflects the expectations of the market participants who buy and sell these types of properties, instead of what is easiest for the appraiser.


Unusual Issues: Some properties may have unusual issues that could impact value and that a typical purchaser would research before putting in an offer. Zoning waivers, parking inefficiencies, easements, evidence of environmental contamination, an element that may stigmatize the property; these sorts of unusual issues must be researched and discussed in the report. Is the appraiser always able to quantify the impact on value of those items? No, but at least the appraiser cannot be faulted if he researches and discusses them in the report. If a property has been contaminated for multiple decades, it is likely that any party to the sale would be aware of that fact. However, that does not negate the appraiser’s responsibility to discuss environmental contamination, as the mere fact that the parties are aware of the contamination does not mean that this factor does not play a part in the thinking of the purchaser. It certainly should be a major issue for the bank that is considering the property as collateral for a loan.


Non-Realty Contracts: Sometimes there are key agreements that are not leases – such as gaming contracts or franchise agreements – that may impact the valuation of TAB. Before purchasing the property, a buyer would obtain and review these agreements. As such, it is incumbent upon the appraiser to do the same.


Sometimes the mandate to reflect the market means that appraisers have to research beyond what is required in a more typical assignment. There are instances when challenges pop up unexpectedly. But there are other times that the property type being bid lets the appraiser know there will be added research. In those instances, it is important for the appraiser to be aware of the more extensive scope of work before bidding. If not, that assignment may be one the appraiser loses money on, rather than turn a profit.



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