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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2008

7 Tips for Commercial Appraisals

To avoid valuation surprises, know how to collaborate with appraisers

c_2008_03_bates_spotBrokers need as much information as possible to ensure their efforts will result in a closed loan that reflects minimum risk. Understanding the professionals with whom you are working is an important part of this process.

One key player in the commercial loan transaction is the appraiser. Appraisers can often be a little hypersensitive -- present company included.

The nature of appraisers’ work pulls them out of the office part of the time, and they rarely meet the same broker, investor or owner more than once or twice. So people attracted to the appraisal profession tend to be independent, introverted and analytical. Appraisers who have the combination of marketing, people and analytical skills are rare birds, indeed, but they do exist.

Because a commercial real estate appraisal essentially is a subjective opinion, all people in the mortgage-origination process want to ensure the appraiser’s opinion is as close as possible to their own estimations. An appraiser is obligated to provide a thorough, honest and comprehensive valuation of the property you are brokering for mortgage or sale. As such, if the appraisal produces a valuation that seems excessively conservative or aggressive, you owe it to yourself and your clients to review the appraisal document and the methodology involved.

The most common setback that brokers face is a lower-than-expected appraisal. The following are seven tips for you to address this problem.

1. Address key valuation points. Appraisers respect hard data. Nothing will gain their respect quicker than a little homework on your part. To support your value argument, find additional data the appraisal report does not include. These data points can be listings, closed comparable sales, capitalization rates, gross-income multipliers and construction costs for newer buildings.

Chances are the information you used to sell your clients on the loan or property is a good place to start. In many cases, brokers have access to property data not available to appraisers. Or if data are available, the appraiser may not use it because transaction, income or building data is missing. Note that you may be challenged to prove that a sale actually closed or a property was actively listed.

2. Be nice. To be successful, you must be insistent. Keep in mind, however, that appraisers see more than their fair share of anger and disappointment. Keep conversations collegial and data-focused.

Commercial Appraisal Checklist

Here are some items to include when you create a checklist for appraisers.

  • Property history
  • Environmental considerations
  • Zoning and tax-assessment data 
  • Rental information
  • Site and market data
  • Demographic reports

3. Examine valuation premises. Every real estate valuation is based on assumptions; make sure that your appraiser’s are correct. Some items that cause false assumptions and can result in artificially low value estimates include the following:

  • Missing or expired leases or lease abstracts: These make the appraiser suspect that the space is actually vacant or not producing a contract rent that may be superior to market rent. Provide this information.
  • Property valued in fee-simple ownership instead of leased fee estate: If the income as leased is greater than if rents were at-market, a lower valuation will result. Such principal assumptions are usually in the “certification and assumptions” section of the appraisal.
  • Property valued “as is” (partially vacant or under tenant improvement) instead of as fully leased: When this results in an undervaluation, it’s because the appraisers provided only the as-is indication instead of it and the “to be” estimates. If the value of the fully absorbed, net-rentable area is left out, your funder has no choice other than to base the loan on the as-is value.

Given the potential for such incorrect assumptions, read the full appraisal. Check the fine print for incorrect assumptions. Sometimes, the valuation is partly based on a traffic count that’s too low, or maybe the appraiser was influenced by some negative press on your anchor tenant.

4. Don’t accept sloppy work. The Uniform Standards of Professional Appraisal Practice provide the generally accepted standards for conducting appraisals in the United States. They dictate what an appraiser must do to create a credible report.

Most of the rules are enforced by your state’s appraiser-licensing board or department. It’s also useful to have a current copy of these rules in your reference library or to review them online at the Appraisal Foundation’s Web site, appraisalfoundation.org.

Further, it is helpful to keep samples of blank apartment- and commercial-appraisal forms to use as content checklists. If your appraisal is in narrative format, it’s too easy for an appraiser to sweep important issues under the rug.

5. Collaborate with the appraiser. Appraisers are allowed to accept consulting assignments as long as they disclose that the consulting report is not an appraisal and that the object of the work is to advocate your position. 

Usually this isn’t economically feasible for borrowers, but it can be if the project or property is large. If it costs $10,000 to get a professional refutation of a low appraisal, the cost is minimal when a $10 million deal is at stake.

6. Don’t engage in battle without ammunition. If you know in your heart that the appraiser’s value conclusion is reasonable, you have little negotiation leverage. It’s better in those cases to work on the deal structure to accomplish your clients’ goals.

You can achieve smaller adjustments, however, because rational appraisers know that their value conclusion can only be accurate within a range of about 5 percent. When appraisers use statistical approaches to value heavily, such as with automated-valuation models, the spread goes to 10 percent.

7. Don’t get a full appraisal in the first place. Getting a full appraisal early in the process has advantages, but there also are negatives. A low appraisal can drive your clients down the street, or the fee and turnaround time may scare them away. Even worse, your lender may reject it because you or your clients ordered it. Instead, you can order a cheaper, faster, restricted-use appraisal when your only immediate goal is to stop your client from shopping around.

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These tips are designed to empower mortgage brokers to not accept an appraisal as the final word on property value. Remember that working with appraisers can be a love-hate relationship -- loving them when appraisals are aggressive, hating them when appraisals are conservative.

Appraisers are an important part of the mortgage origination process. The more you know about working with them, the better the process will work for you.


 


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