Valuation Management Group Discusses Appraiser Critical Thinking – Does it Make Sense? Part 2

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Valuation Management Group Discusses Appraiser Critical Thinking – Does it Make Sense? Part 2

One very important service Valuation Management Group provides its client partners is the review of residential and commercial appraisals prepared by independent appraisers. Appraisers must apply critical thinking in the writing of the report and VMG review appraisers must do the same during the review process. Applying critical thinking and asking the question “Does it make sense?” should result in a better reasoned and thus more credible appraisal report and review.

This article serves as Part 2 to the first article on this topic that we presented last week. To further illustrate the importance of critical thinking, we gathered another handful of examples from recently conducted commercial reviews.  The answer(s) to the following questions could potentially affect the value conclusions and perhaps the client’s ability or desire to lend on the subject collateral.  Preface each of the following points with “Does it Make Sense” –

  • to provide a value conclusion of the Fee Simple Estate when the subject is leased for many more years? What is the lender/client’s collateral? If the contract rent is far from market, what makes the most sense to do to better serve the client? The Dictionary of Real Estate Appraisal defines Fee Simple Interest and Leased Fee Interest in a way that appraisers are led to the conclusion that anytime the subject property is encumbered by a lease, including partially, the leased fee property rights must be valued. Additionally, the leased fee property rights do transfer with ownership. So, if the market rent is found to be greater or less than the contract rent, a leasehold estate exists in which the tenant holds a positive leasehold or a negative leasehold position. Any investor or lender of the subject property should want to know and understand that position and its impact on value.
  • to use retail rent comps ranging from 900 SF to 1,850 SF for the subject’s spaces ranging from 2,400 SF to 14,120 SF? What size rent comps are appropriate for the 14,120 SF space? If there truly are none in the market, what does that tell you about the market? It is best appraisal practice to use comps of similarly sized spaces. The same tenant for a 900 SF would not likely be the same tenant type for a 14,000 SF space. And if there are no similarly-sized rental spaces in the market, that may lead the appraiser to the conclusion that demand does not exist for the space size.
  • to use a 0.5 acre land sale comp for the subject’s 166 acres? Does it make sense to use that 0.5 acre lot as a comp when it was located in a planned resort community with ski runs within walking distance while the subject is vastly dissimilar? Just as in the prior example, we need to analyze user and buyer types. The same buyer type would not be interested in the subject 166 acres and the 0.5 acre lot, at least not for the same purpose. Therefore, using the 0.5 acre lot as comparable does not make sense.
  • after selecting from the universe of all sales the small handful that are most similar to the subject and after applying all appropriate adjustments and the spread from low to high remains over 100% wide? Would it be more appropriate to query whether meaningful adjustments are missing or whether the magnitude of the adjustments used is off? Although it’s true that a an appraisal uses both a combination of math and analyses to develop an opinion, the math should not end at a point where the data to analyze is so far apart that one could choose vastly different values based upon the price/unit range. The goal of the sales comparison approach is to compare and contrast the comparable data to the subject property in way that mathematically whittles the indicated value range down to a reasonable indicated range.   If after applying all adjustments, the range is still fairly large, perhaps a needed adjustment has not been applied or an adjustment that is applicable has not been considered.
  • to reconcile near the average of the adjusted prices without considering that one of the comps needed almost no adjustment while the others needed substantial adjustment? Or when the confirmation process yielded thorough and detailed info on one comp and the other comps were confirmed by no more than a deed and CoStar? In a perfect valuation, the appraiser would have four perfect comps to use. However, given the wide variety of construction types, use types, tastes, and locations, perfect commercial comps are nearly impossible to locate. Usually some factor needs adjustment for each comp; some more so, others less. It stands to reason then, that the appraiser should consider which comps should be weighted more or less in the final approach analysis.

 

Getting in the habit of thinking critically when performing and/or reviewing an appraisal report should result in more credible appraisal reports – the primary goal of all parties. Valuation Management Group’s commercial appraiser team is here to answer any questions and assist you in any way.

Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process, including the required review, for financial institutions, banks, mortgage bankers, and credit unions. We offer the full array of commercial and residential appraisal products and services, taking the appraisal process from ordinary to extraordinary.

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