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.
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The Appraiser's Approach by Michael P. Hedden, MAI, FRICS, and Marc R. Shapiro, MAI, MRICS In light of the current economic conditions, valuing real estate has become more com- plicated, and more attention is being paid to the appraisal process and the appraiser's opinion of value. Prior to the economic downturn, the volume of transactions made valuing real estate a more transpar- ent process; however, that has changed and recent media reports portray appraisers as purported deal killers. Buyers, sellers, investors, and brokers, although market participants, do not have the same third-party obligations to support their positions with factual market evidence. T e price established by the participants in a single transaction has to be supported by other market evidence in order to be refl ec- tive of a market value. Members of the Appraisal Institute and certifi ed appraisers are trained to defi ne the valuation problem, develop a work plan, and collect and analyze the relevant data to arrive at a well-reasoned value opinion. Equipped with knowledge and skill, appraisers apply their judgment to best advise the user of an appraisal with a value opinion that best refl ects today's eco- nomic reality. A comprehensive market analysis is an essential part of the appraisal process and is necessary to render a well-founded opinion of value. T e process starts with an under- standing of the property's use or potential CCIM.com use, which creates its value. Armed with that knowledge, the appraiser can form judg- ments about how a property fi ts the needs of owners and users in a particular market. Looking outside the subject property, it is the appraiser's job to research and under- stand, on macro- and micro-economic levels, supply and demand parameters as they can impact a specifi c property. T is economic insight forms the basis of the highest and best use conclusion, which is a critical part of every appraisal. Relying on the Appraisal Institute's body of knowledge and adequate due diligence, appraisers should bring to each assignment a clear understanding of the potential users/ buyers of the property and the likely demand for that property. Interpreting the Data Appraisers have a responsibility to under- stand market trends and advise their clients on whether the continued use of existing improvements is consistent with a property's highest and best use or whether an alternate use, redevelopment, or remodeling should be considered. Market cycles vary across market sectors and regions, and appraisers must apply their skill in judging a property's ability to capture its market share of demand and whether its use represents the maximally productive use of the property. Understanding what's hot and what's not in real estate markets is critical to an apprais- er's ability to arrive at a value conclusion that is market-supported. As a reporter of market behavior, the appraiser's role is to report on market conditions and the activity of buyers and sellers and tenants and landlords and to be an advocate for the value, not to infl uence market forces or to be an advocate for their client, which distinguishes appraisers from buyers, sellers, investors, and brokers. As the occasional deliverer of bad news, the appraiser is not to blame. T e users of appraisal services should expect a competent and well-founded opinion that is suffi cient to solve the valuation question and should demand that their appraiser be knowledgeable and able to communicate their view of market conditions and, most importantly, how these conditions relate to the subject property. T e truly professional appraiser contributes a valuable service to clients, as well as the gen- eral economy, with the truthful portrayal of the property's value and extant market condi- tions whether the news is good or bad. Michael P. Hedden, MAI, FRICS, and Marc R. Shapiro, MAI, MRICS, are managing directors for real estate valuation in the Real Estate Solu- tions Group of FTI Consulting. Contact them at michael.hedden@fticonsulting.com and marc. shapiro@fticonsulting.com. May | June | 2012 35 Robyn Mackenzie/Veer