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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2016

Find Value in the Balance

Accurate, straightforward comparisons are essential when putting a price on property

Find Value in the Balance

Establishing the value of commercial property can be a quarrelsome and time-consuming process, but there are effective methods of standardizing measurements and smoothing the valuation process.

There are many variables commercial mortgage brokers should consider when helping clients shop for funding to buy or refinance commercial properties, but the lending decision ultimately comes down to one fundamental question: What is the property worth?

It’s a simple question, but a complicated one to answer. Most important in the process is determining what comparable properties are worth and the general condition of your client’s property. Pursuing those answers can become a lengthy and contentious process that often is guided largely by subjective criteria — with plenty of opportunities for discrepancies and differences of opinion to arise among the borrower, the lender and the appraiser.

Straightforward, easy-to-analyze information is at a premium during the property-inspection process. As a commercial mortgage originator, anything you can do to provide that sort of information to your prospective lender promises to improve the chances that your clients’ mortgage applications will be acted on promptly and approved.

A cumbersome process

Are the comps current and accurate, providing an apples-to-apples comparison? Does a property require maintenance or repairs — and, if so, what impact will that have on the value? What will those repairs cost, how long will they take and will they delay closing? Is there a history of structural or environmental problems with the property, and have they been corrected properly? Is that sawdust around the doorframe a sign of fresh termite infestation, or residual debris from a problem recently addressed?

Any disagreement on the answers to those questions can add weeks or even months to the mortgage approval process. When such disagreements arise, they are normally not the fault of the lenders or the borrowers, or even the professional collecting and analyzing the inspection information. More often than not, the dissension stems from how the inspection data is collected, collated and shared.

Typically, the starting point for a commercial property inspection is a pen-and-paper process, occasionally supplemented with photos. Once the pertinent information has been collected, it is either maintained and shared in its paper form, or must be manually entered into spreadsheets or other computer files — overall a time-consuming, inefficient, inconsistent, poorly structured undertaking that makes sharing and comparing data difficult. Although sophisticated analysis enhances the value of commercial real estate data, and can make real estate transactions more efficient, the analysis is much more difficult when you’re relying on manual tools.

Seeking uniformity

How can this process be moved into the 21st century, ensuring that property data is captured in a manner that’s uniform, shareable and searchable? The first step is to throw out the clipboard and bring in a modern device like a tablet, phablet or smartphone. These devices are ubiquitous and make collecting, storing and sharing inspection information fast, efficient and consistent.

Straightforward, easy-to-analyze information is
at a premium during the inspection process.

Following are some of the key attributes any effective new inspection technology should possess:

  • Extensive, customizable forms: Any solution should include an exhaustive selection of inspection forms, fully customizable to meet the lender’s requirements and cover the key criteria for a pre-mortgage property inspection. That should include allowing users to set property types (one story, multistory or high rise); categories (multifamily, manufacturing, retail, etc.); general conditions; finishes and fixtures; and manufacturers and more for interiors, exteriors, amenities, common areas and grounds.
    It also should allow choices on the forms via features like checkboxes, radio buttons and drop-down menus to rate asset attributes, as well as customizable rating labels, values, symbols and colors, and the ability to add a score or cost for each item or attribute inspected
  • Fully functional offline: It would be nice if we had reliable internet connectivity wherever we went, but we don’t. Consequently, no solution should be built on the assumption that the properties to be inspected will have fast, reliable cellular or Wi-Fi connections.
    That means the application should operate offline, fully native on a variety of standard mobile devices using the iOS or Android operating systems. Then, when the inspector returns to the office, the application should automatically connect, sync and share the information digitally.
  • Inline photos and comments: The old adage “a picture is worth a thousand words” is far more than a cliché when it comes to documenting actual property conditions during an inspection. Photographic evidence is fundamental to resolving disagreements and disputes. How big is that crack in the foundation? Oh, well, here’s a photo of it right in the record, showing the crack with a yardstick next to it.
    Printing and stapling photos to paper forms, or uploading them from a digital camera or camera phone, has become an archaic approach. Digital photos are integral to the loan application and should be time-stamped, dated and incorporated in the inspection report, along with detailed comments from the inspector.
  • Common terms: Providing consistent inspection reports in a timely fashion requires standardization of the data categories collected. That means different inspectors working for the same lender need to use the same terms and descriptions. Otherwise, you end up with a Tower of Babel that is replete with inconsistent, unintelligible and unsearchable data.
    If one inspector calls a small bathroom a “half-bath,” the next describes it as a “powder room” and a third says it’s a “water closet,” searching the data becomes problematic. How can one property be compared against another to determine relative value if the same attributes are described inconsistently? Any inspection solution should include standardized comments and terms, as defined by the lender and made selectable by menu, to ensure the uniformity and consistency necessary to search and analyze the data.
    Applying these guidelines to the adoption of technology for modernizing commercial property inspections will have immediate benefits — including greater consistency in the reporting process; faster and easier collection and sharing of inspection information; faster dispute resolution; and ultimately a shorter financing-approval process that satisfies both the lender and borrower.
    More broadly, if lenders have access to uniform data across hundreds — and even thousands of inspections — they can begin to apply deeper data analytics that will allow them to gain keen insights for improving their overall business processes and making better lending decisions. Such a data-driven process also may help them to identify a continuing and consistent set of problems with certain properties or locations, allowing lenders to avoid approving risky loans.

•  •  •

The benefits of modernizing the property-inspection process are clear, and the tools for doing it exist today. The key question is no longer whether lenders should adopt these new technologies, but rather why they haven’t done so already.


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