Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. In this post, John piles more on the plate appraisal pressure buffet, providing additional insights, that even years of pressuring him, I didn’t fully appreciate he had. He sends the clear message that appraisal pressure is like going to a bad restaurant. The customer won’t complain if the food and service doesn’t meet their standards, they simply won’t come back.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Fridays on Sundays, one of the smartest guys I know. …Jonathan Miller

Just a few more words about appraiser pressure before I let this go. When I teach my Valuation class at NYU, I ask on the first day, “Why do appraisers get hired?” The answer “Because they have to be.” Sure, on occasion there will be someone willing to come out of pocket to find out what the professional appraiser says the value of their property is, but 90% of the time appraisers are hired because they have to be:

* When a mortgage loan is made, the federal government mandates an appraisal to assess the collateral
* When securitizing a loan, the rating agencies require an appraisal to assist in rating the debt
* When paying estate taxes, the IRS requires an appraisal to assess the value of the inheritance
* When doing estate planning, an appraisal is similarly required by the IRS
* When negotiating an equitable distribution in a divorce, the two sides need an appraisal for their settlement
* When an investment fund acquires real estate, it requires an appraisal to monitor the value of the asset for periodic fund reporting

And the list goes on. And in each case, the client has a strong interest in the outcome of the appraisal. The investment banks want to see it high to get a higher rating on its debt. The estate wants to see it low to minimize the estate taxes. The pension fund wants to show its investors that it made a good purchase and is creating value over time.

The investment banker makes a bigger bonus if he pushes more money out the door. The asset manager at the pension fund is rewarded if his assets perform well. And so on.

Appraiser pressure is not just the sleazy mortgage broker threatening to pull the plug if you don’t make his number. In most cases, appraiser pressure is oh so subtle.

I was told recently by a prestigious investment fund that they thought our appraisal was low (even though we concluded to the 2 month old purchase price, and confirmed that the circumstances of sale were “market-oriented”) and that if our conclusion was not higher the report was “going to get a lot of attention and be reviewed to death.” The sub-text: we will not be permitted to finalize the report that is out in draft and submit the invoice until we have been raked over the coals to “prove it.” Sticking to my guns will be a long, painful and ultimately costly process, whereas if I agree to change my value during this draft phase, no one will be the wiser, I can finalize the report, submit my invoice and move on.

In most cases, appraiser pressure is impossible to prove. If you kill a deal or “disappoint” the client, you just don’t hear back. In most cases, nobody is so stupid as to make an overt threat. It is just understood.

I get excited when I read all the press about the AG cracking down on appraiser pressure, until I realize that our system is so fundamentally flawed that it is likely beyond repair.


3 Comments

  1. Jim MacCrate July 7, 2007 at 5:16 pm

    Max Ramsland, MAI, from Duluth, Minnesota was threatened by attorneys once on an engagement that we worked on together. I was astonished to say the least!

    C’est la vie!

    Jim

  2. Adrian Torres July 12, 2007 at 9:06 pm

    However subtle “pressuring” may be, it is still very real. 90% of appraisers interviewed said they have been pressured. One can only hope the proper legislation is pushed forward to thwart pressuring, though it is so ingrained into the whole process that it may very well prove impossible to extirpate. I tip my hat to you Mr. Cicero for sticking to your guns in the face of a “prestigious”:p company. I had done the same recently, and found comfort in this commentary . . . not being sure I had made the right (business) decision.

  3. marty tessler July 29, 2007 at 1:17 pm

    John-for a very long time I have had a major difference of opinion-remember that an appraisal is an opinion-with many of the appraisers practicing the ‘craft” who are merely apply their averages whether its market rents, sales price per sf, cap rates, IRR’s and come up with a value. I have long maintained that the job of an appraiser is not only to mirror the market but to ASSESS where that market is currently headed and to pull the trigger on value even if it is a call or opinion on the appraiser’s part that is not borne out by any average-I call it MARKET DYNAMICS.What interested me about your comment that you came up with the value that was identical to the 2 month old purchase price of the property begs the question as to whether MARKET DYNAMICS was heading higher, staying status quo or declining in the interim period between the sale and your date of value. In my OPINION-any appraiser worth his fee (unless of course the fee was too low) should be able at the end of any assignment to call on his professional expertise and bring in the MARKET DYNAMICS part of an opinion as to value and not just to come up with an average. Not knowing whether your call on value was based on average, high average or low average ranges I would like to see the appraisal practitioners use market dynamics in arriving at their final value and be able to articulate why. Its the difference between throwing a completed pass and an interception in football-don’t let the clients break up the pass a/k/a/ value-nail it down and stick with it and if they stall on paying you because its a draft report awaiting a final, tell your wife she’ll have to get a second job.

Comments are closed.