Category Archives: Working with Appraisers

What's the Cap Rate?

A group of brokers recently asked me to comment on another appraiser’s newsletter. The newsletter reported three capitalization rates, each for a different property. “How can this possibly be the retail cap rate in our region?” they asked about one.

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The Valuation of a View

I presented a PowerPoint presentation on the appraisal of the Olana Viewshed (and conservation easements in general) on May 16, 2009 at the Hudson Valley ASA Fred Iusi Conference in Albany, NY. Here’s a sample of the presentation (without audio).

[slideboom id=69270&w=425&h=370]

Appraising Appraisals

There are times when the client’s opinion of value differs from the appraiser’s opinion of value. This could be due to the appraiser’s mistake or omission, or the client’s lack of understanding of the appraisal process. Two recent articles, one intended for clients (Oh no! It’s low!, Realtor Magazine Online, 6/1/06) and one written for appraisers (A Better Way to Handle Value Disputes, Real Estate Valuation Magazine Online, Summer 2006) suggest ways to resolve the problem.

First, you’ll want to ask the appraiser’s client (if you’re not the actual client) to authorize the appraiser to talk to you.

Then look in the report for elements of confusion. First, are there any factual mistakes or omissions in the site or building descriptions? And second, do you know of any other sales or leases similar to the subject property that would have had an affect on value if the appraiser analyzed them? As important as these two factors are to the appraisal, it is possible that the appraiser was not aware of information you may have.

Most appraisers would be happy to reconsider an appraisal in the light of information that is new to them.

10 Ways to Stumble in Commercial Real Estate

Vivian Marino writes in the November 12, 2006 New York Times,

As the residential market softens, many hands-on real estate investors are turning their attention to the commercial side…Making the jump, however, is not always easy.

Ms. Marino’s advice comes largely from “Commercial Real Estate Investing: 12 Easy Steps to Getting Started,” by Jack Cummings. The 10 ways to stumble:

No Financial Plan: The first step in investing is to have a plan based on your goals.
Thinking Location Only: “It’s not location, location, location – it’s location, use, and approval.”
Not Researching a City: Local political attitudes can block your ability to obtain a permit for a use allowed by zoning.
Seeing All Areas as Similar: “What goes on in San Francisco may appear to be the same as what is going on in Chicago or Miami, but in reality it is not.”
No Thought to Tenant Mix: “You can’t expect to draw much business unless you have the right mix of tenants, both within your property and in the neighborhood.”
Miscalculating Costs: “Inspection by a qualified engineer or contractor can help uncover hidden problems.”
Miscalculating Returns: “To get an idea of your initial rate of return…review expenses and income for the most recent year.
Taking on Onerous Debt: “Some investors use their cash flow to pay off principle on their mortgages, thereby speeding up the amortization schedule.”
Doing It All Yourself: “Experienced investors typically have a group of experts in place, including brokers, engineers, lawyers, accountants and property managers, to help with conduction due diligence. (May I humbly suggest appraisers?)
Procrastination: “What good is doing the research if you never put it to use?”

Click here to read the entire article.

The Scope of Scope

How do the appraiser and client determine the appropriate Scope of Work? The design of the Scope of Work for an appraisal assignment is clearly stated in the USPAP Scope of Work Rule:

“For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:

  1. identify the problem to be solved;

  2. determine and perform the scope of work necessary to develop credible assignment results; and

  3. disclose the scope of work in the report.

An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results.”

USPAP continues with the following comment:

Scope of work includes, but is not limited to:

  • the extent to which the property is identified;

  • the extent to which tangible property is inspected;

  • the type and extent of data researched; and

  • the type and extent of analyses applied to arrive at opinions or conclusions.

Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment.

Credible assignment results require support by relevant evidence and logic. The credibility of assignment results is always measured in the context of the intended use.

Credible Credibility

I mentioned in my last post the importance of the the “credible appraisal.” The Scope of Work employed by the appraiser must be sufficient to produce a credible appraisal. The Uniform Standards of Professional Appraisal Practice (USPAP) has always required the appraiser to produce a credible appraisal. The current edition of USPAP defines “credible” as

“worthy of belief”

USPAP, in the section devoted to the new Scope of Work Rule, comments further on credibility:

“Credible assignment results require support, by relevant evidence and logic, to the degree necessary for the intended use.

The scope of work must include the research and analyses that are necessary to develop credible assignment results.

The scope of work is acceptable when it meets or exceeds:

  • the expectations of parties who are regularly intended users for similar assignments; and

  • what an appraiser’s peers’ actions would be in performing the same or a similar assignment.

Determining the scope of work is an ongoing process in an assignment. Information or conditions discovered during the course of an assignment might cause the appraiser to reconsider the scope of work.

An appraiser must be prepared to support the decision to exclude any investigation, information, method, or technique that would appear relevant to the client, another intended user, or the appraiser’s peers.”

The Departure of Departure

One of the most confusing aspects of the Uniform Standards of Professional Appraisal Practice (USPAP), for both appraisers and their clients, has been the Departure Rule. Departure has been around for about 12 years and allowed appraisers to “depart” from certain requirements, which resulted in a “Limited” appraisal. Knowing when a limited appraisal was allowable was difficult for the appraiser and the client to determine. Indeed, Complete and Limited appraisals were often confused with Self-contained, Summary, and Restricted Use reports.

Well, Departure has departed. Departure, along with Complete and Limited appraisals, left the USPAP vocabulary as of July 2006 and the Scope of Work Rule has arrived to take its place. The Scope of Work Rule allows the appraiser to determine the type and extent of research and analysis needed to satisfy the client’s needs and objectives. USPAP spells-out the minimum requirements.

The standard to which the Scope of Work is designed for a given appraisal assignment is credibility. Whatever the Scope of Work, the resulting appraisal must be credible. Appraisers and prospective clients should discuss Scope of Work and Credibility before commissioning the appraisal.