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. Today John laments that clients are losing the ability to discern a good appraisal from a bad appraisal…[hint] its all in the data.
Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller
What’s the difference between a good appraisal and a bad appraisal (or at least an appraisal that’s not so good?) I have used my Soapbox many times to rant about how it seems that clients consistently put fee over quality. It’s suddenly dawned on me that many people can’t tell the difference, including bankers that buy appraisal services daily?
I use better, in this case, to mean more reliable, with appropriate support in the written report. Many appraisal reports look the samethey have the same layout, use pretty pictures and mapsand have all sorts of theoretical equations and definitions built into the boilerplate. So, what makes one appraisal “better?”
I strongly adhere to the garbage in, garbage out theory; that is, every appraisal is based on an analysis of market data. If the appraisal bases his/her conclusions on poor quality data, then the conclusions will most likely also be flawed.
So, to the buyer of appraisal services, I offer these tips for assessing the reliability of your appraisal:
- Are the sales comparables used in the appraisal recent? The real estate markets have been moving very quickly and there has been considerable sales activity across property types. The appraiser should have a good reason for basing his analysis on sales over 6-12 months old. In most cases, this represents data that the appraiser has in his file, but is usually not the best data.
- Similarly, are the rent comparables recent? I have seen many appraisals where the rent comparables do not include a date of lease; there may be a big spread between a listing and an actual executed lease?
- How much detail is given about the comparable? The report should have sufficient detail to enable the reader to relate the comparable to the subject. If the appraiser knows nothing about the comparable except what it says in the public records, then he probably can’t do a very meaningful analysis.
- What was the source of information? Verifying comparable data is a time-consuming and difficult job; it’s also the most important in getting it right. I have seen plenty of instances where conclusions were based on comparable data that was not arm’s length, was part of a portfolio sale, or had some other issues that would invalidate it.
- Flip to the Appraiser’s Qualifications in the addenda; in all likelihood the most junior person listed is doing the majority of your appraisal. You may be paying a lower fee, but you are also (possibly) getting a relatively inexperienced person’s professional opinion.
Remember, most appraisers are compensated on a fee split basis. Therefore, the sooner they get a report out, the more they will earn. This is at odds with thoroughly researching the market to ensure a reliable opinion of value.