Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/64804
Appraisals in today's market are not for the faint of heart. Comparable sales are scarce, markets are changing quickly, and rules and regulations are stricter than ever. One false step could imperil even the most solid transactions. "Today, there can be signifi cant gaps in valuation metrics across property classes and among the various markets and submarkets," says Von Moody III, CCIM, CRE, MAI, senior manager of T omson Reuters in Denver, N.C. "T ese gaps can create hazards." And these hazards can create angry brokers. Mind the Gaps "Lack of comparables has appraisers using properties that would never have been accepted four years ago," says Eric R. Rehn, CCIM, vice president of Cassidy Turley in Walnut Creek, Calif. Rehn sees appraisers using comps from other markets, not giving credit if a comp is a "fi re sale" or real estate-owned, and underestimating values by as much as 25 percent. But such practices aren't just com- mon in Walnut Creek. Russell Byron Webb, CCIM, managing partner with Silver Oak Commercial Realty in Southlake, Texas, notes that an appraisal almost aff ected one of his recent sales because the appraiser used a 30-year-old class B offi ce building as a comp for a newly built class A building. T e bank ordered another appraisal. In other cases, acceptable comps might not be able to off set rapidly changing markets. For example, James B. Marian, CCIM, of Chapman Lindsey Commercial Real Estate Services in Tucson, Ariz., recently listed an REO land property that had to be continually reappraised because the market was declining so quickly. By the time he got a new list price, the market would already have dropped well below the appraised value, and the bank refused to sell below that value. To avoid these precipitous price declines, Marian says, appraisers should be required to "disclose market trends and communicate possible near- term value adjustments, especially in rapidly declining markets." For some commercial real estate professionals, these market con- ditions have spotlighted a fundamental shortcoming: "Appraisals are retrospective documents, which means they are based on out- CCIM.com dated data, especially in declining or appreciating markets," says Stephen R. Collins, CCIM, executive vice president of Environ- mental Liability Transfer in St. Louis, Mo. "Inves- tors are prospective, which means they consider factors other than past sales." Col- lins suggests that, in most cases, investors can underwrite deals more accurately than appraisers. WHAT ARE APPRAISALS WORTH TO YOU? This article has already generated a wide range of feedback from brokers and appraisers. What do you think? Share your comments on the article page at CCIM.com/cire. A Safer Path For their part, appraisers know they can't please everyone. But they also recognize that they have to use all of the tools in their tool- box to make a credible valuation. When appraising investment properties today, the key factor is net operating income, says Randy Scheidt, CCIM, MAI, FRICS, president of Don R. Scheidt Co. in India- napolis. "Tenants are asking landlords for concessions or moving out, and these prop- erties might lease up for less," he explains. "We all need to do a better job giving credible projected income streams to future buyers or current owners." If current comps aren't available, an old property with a similar projected NOI might still be useful, Scheidt adds. But appraisers need to clearly docu- ment their reasoning in such cases. Appraisers can also use local listings to bolster a more forward-looking analysis. "We generally use four sale comps and two May | June | 2012 33 Ocean Photography/Veer; Alloy Illustration/Veer