Wed 9 May 2012
In today’s New York Times Julie Satow writes about commercial appraisals in her article Accuracy of Appraisals is Spotty, Study Says.¬†¬† The article was not particularly flattering to commercial appraisers as it noted that in a recent study that examined sales prices and appraised values, the appraisals were high 64% of the time.¬† Overall, though, I think that she did a great job with this article.¬† I am quoted commenting (complaining?) about the commoditization of appraisals and the evolution of the appraisal from integral professional service to commodity.¬† (A frequent comment of mine!)
I agree with the comments of Bill Garber, the director of government and external relations for the Appraisal Institute, that comparing the values with prices can be misleading.¬† I did not review the study that Ms. Satow referred to in her article but from my many years in this profession I have seen how frequently appraisals are misinterpreted.¬† Price and value are not synonymous.¬† For example:
- What was the time difference between the date of value in the appraisal and the eventual sale? Remember that the appraised value represents a point in time and a sale six months, a year or more after that time can reflect very different market conditions.
- Is the study confusing a stabilized value for an “as is” value?¬† If a property is not operating at stabilized occupancy (whatever that is for a particular property type in a particular submarket) the lender will typically ask for a future value upon stabilization as well as the value based on the lower occupancy (in its “as is” condition).¬† Was the property in the same condition and occupancy at the time of sale as premised in the appraisal?
- Was the appraisal based on any extraordinary assumptions.¬† Per the Uniform Standards of Professional Appraisal Practice (USPAP) any specific assumptions regarding a property must be clearly specified in the report.¬† For example, did the appraisal assume that a major lease that was out for signature get executed, whereas by the time the property sold that lease negotiation fell through?
- Did the circumstances of sale truly meet the definition of market value?
The list of potential differences between the premises of the appraisals and the circumstances of actual sale can go on and on.