Reese's Observed Conditions

So You Need An Appraisal!

June 11, 2013
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As a commercial real estate appraiser, I get a fair number of phone calls and emails every month requesting an appraisal on a commercial property. The first question is usually what will it cost? OK, this is a fair question, but it puts the appraiser into an unfair position. The questions that a credible appraiser should then ask you are specific to your needs. Price does come into play, but you don’t want to pay for a report that in the end will do you no good.

Here are questions that you should be asked, or if you read this blog, you will know what to request!

What is the purpose of the appraisal? Appraisals are required for many different reasons. If for a lender, then the report will help with the underwriting of a mortgage loan – new or refinancing loan. If for litigation, the report will help support the attorney working with you on value as part of the litigation process. If you are buying or selling a property, then the appraisal report can give you a clearer idea of market value on specific property types in a specific market area. There are many other reasons to also need an appraisal. Be specific in stating the purpose.

Who is the intended user of the report? It is important to let the appraiser you are contacting know who will be the client(s); who will be using the appraisal report. Is it for the calling party’s personal use, say in setting a sales price? The intended user may be a lender. Lenders often have specific report guidelines that must be adhered to. Is the intended user a lawyer, or CPA that is working on an estate for tax reporting. Is the intended user the local Tax Assessor for tax appeal? Different intended users trigger different types of appraisals as necessary to be credible for their specific use. Be clear about who will use the appraisal report.

Is the required date of value sometime other than the present? In most instances, the date of value for an appraisal is the date the property is inspected by the appraiser. However, there are other dates that might come into play. If for an estate of a deceased person and tax reporting, it might be the date-of-death (DOD) of that individual. If for tax appeal, it should be as of January 1, of the year of the appeal (at least that is the case in California where I work). If gifting a property, it will be the date of the gift. Other dates may apply so be specific as to the date of value that you need.

What type of appraisal is required? The two main types of appraisals often required are a complete appraisal in a summary narrative format and a restricted use report. The former is a more inclusive report while the latter is a shorter format. For the restricted use report, often, but not always, one method of valuation is used (i.e. the Sales Comparison Approach) and a good amount of the data collected and analyzed is retained in the appraiser’s work file, should it be necessary to expand the format in the future. In the summary narrative format, the appraiser includes research, analysis and background data on the subject and comparables. This format should lead the reader along the valuation process to an understanding of how the property was valued and to the ultimate value conclusion.

Of course there are other formats available. Another format can be more relevant to the property type and need. These other formats can also be discussed with the contacted appraiser at the time of your call.

Timing of need for an appraisal report? This is often a stickler for appraisers. Many end users of appraisal report wait until they are almost in a panic mode before reaching out to order a required appraisal. This situation often results in not being able to find an appraiser willing to commit to a very short turn-around time, or may result in a much higher fee. Appraisers are also business people with a life outside work. They will be the ones giving up the weekend and working often long into the night to meet an expedited demand. As the old saying goes…”time is money”. So if you want an appraisal in a hurry, if it’s possible at all, it will likely cost you more! Plan ahead. It often takes several weeks to collect the data needed for a report due to the fact that those individuals who need to be contacted are not available for one reason or another. Vacations, legal holidays – closed institutions/offices, and other factors can unexpectedly delay the appraisal process and hence the delivery of your report. Then there is also complexity of the valuation itself. More complex property valuations take longer!

Back to the issue of cost.
Armed with all the facts from the above, an appraiser can then estimate the time it will require to complete an assignment. I suspect that most appraisers, me included, look at an hourly rate for services. The more complex the property and the appraisal process, the more hours will be involved. This is why it is so important to provide the appraiser professional with all the facets of need first before requesting the cost.

Make sure you contact a competent appraiser to do the work you require. You can check out state licensing and potential complaints on your state’s website under the real estate appraiser licensing section. Get recommendations from other users of appraisals. Talk to brokers, attorneys, CPAs, or other professionals who might be familiar with an appraiser’s competency.

Make sure you get what you are paying for in quality, format, timing and price! As is often true of other purchases… get what you pay for….make sure you go into the process informed and informing to receive the best customer service. Your business is always appreciated!

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Just What Are the Market Fundamentals Now?

June 28, 2011
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I recently read an article by Peter Ingersoll in the March 2011 Registry-Bay Area Real Estate Journal entitled “Mind the Fundamentals”. Mr. Ingersoll cleverly integrated references to football and stories/quotes by Green Bay Packers coach Vince Lombardi to a discussion of the current real estate market. This article got me questioning…..just what are the fundamental of the current market? My specific point of reference with regard to market watching is the Bay Area, but my readings tend to be national in scope. Here are a few highlights and quotes that I have recently read that are of interest to me and may be to you as well.

In Mr. Ingersoll’s article, some of the math of capitalization rates and interest rates were interesting to me as an appraiser. This is especially true in that the long term impact of the Feds if interest rates are raised. Cap rates have risen, but not substantially. What if a property is purchased at today’s rates for say an 8% capitalization rate. If the interest rates rise and the loan is adjustable, the indicated capitalization rate based on existing leases on the property would also rise and the value decline.  In order to keep the value up, rents would have to increase greater than the increasing cost of expenses. Wonder why the smaller investors are sitting on the sidelines and watching and not active? This uncertainty may be one of the reasons.

More recently, in an email that I was copied on between a Marcus & Millichap broker and Cam-L Investments Inc., the following was asked: 

“Even if you locked in rates for the next seven years at current low rates, what happens seven years out when rates will probably be 9-10% and you haven’t been able to keep rents above inflation?  What’s the value of real estate then if you currently buy at 6-7% cap rates, but market caps, then need to be in the area of 9-10%?”

Yes, this was used as a marketing question to try and lock in current loan rates (further sales of listings), but it speaks to what is happening in the marketplace at this time.  Also taken from this email is the following.

Current cap rates are NOT taking into account the tremendous risks investors are facing over the next 3-5 years. Greece is going to default:  the Euro will probably collapse, 61% of the entire federal debt will mature within 4 years, and most world banks are in a world of hurt…next defaults will probably be Italy and Spain.

In a nut shell there is tremendous risk out there and trying to predict interest rates over 12 months is an exercise in futility.

“On of the last Profitable tools and reasons for owning investment real estate (which is illiquid) is the ability to use leverage.  But with so many unknowns in our financial systems and unemployment stick as it is, an investor almost has to sacrifice leverage and put 30-40% down, (apartments are probably the safest bet). But then the question remains, can rents be raised above the inflation rate on an annual basis? True inflation is probably currently running about 5%.

I am not normally a pessimistic guy, but we are entering TOTALLY uncharted territory.”

In an article by Daniel Thomas, a correspondent for the Financial Times, published on June 3, 2011 entitled “Caution still keynote for commercial property”,  owners and investors are noted as expecting activity to remain subdued in the next six months.  In this article, investment decisions were also reported to be held back by uncertainty.

Here’s another warning from an article in the June 22, 2011 Appraiser News Online.

UCLA’s Shulman: CRE Prices Pushed Beyond Fundamentals

The second quarter UCLA Anderson Forecast released June 15 showed that commercial real estate prices are being pushed beyond their fundamentals by low 10-year treasury rates and well-capitalized investors, according to a June 16 MBA NewsLink article.

David Shulman, senior economist at UCLA Anderson Forecast, told MBA NewsLink that with the economy growing at 3 percent a year, “it will take a long time before the fundamentals catch up and the net operating income justify the valuations at a higher cap rate.”

Shulman noted that stocks are currently trading at “nosebleed levels” for multiples of cash flow — either funds from operation or adjusted funds from operation. However, bankers who avoided commercial real estate loans last year are aggressively returning to the market, according to the article.

“Simply put, a near-zero federal funds rate and 3 percent 10-Year U.S. Treasury yields have lit a fire underneath the high-quality end of the real estate market,” Shulman told MBA NewsLink. “The public equity REITs perceive themselves to have an unusually low cost of capital, and they are buying top (assets).”

Meanwhile, as bids for high-end properties begin to increase, Shulman noted that more investors are showing interest in mid-tier properties. “People may say location, location, location, but when the money turns on or the money turns off, it doesn’t matter,” said Shulman, according to MBA NewsLink. He also noted that low-end properties are benefiting from low interest rates. 

These authors are echoing each other! Are we in for another real estate crash in the future? Are these the unintended consequences of the Fed controlling interest rates, the banking industry and the market’s response to these controls as it tries to right itself? 

On the housing front, FHA lenders Fannie Mae and Freddie Mac plan to sunset the program that allows higher debt ratios on homes in higher priced areas on October 1st.  In October 2011 the maximum loan will decrease from $729,750 to $625,500 with a minimum of 3.5% down payment. The effect of this move, if it happens, means that those sellers with homes listed between $910,000 and $780,000 will see the largest impact.  The net effect of these changes means additional downward pressure on sales prices as fewer buyers are able to qualify for conventional financing. I expect this will have the effect of further suppressing home prices in the Bay Area where in most cities the average price is at the higher noted end of the current jumbo loan range. 

Will the change in financing guidelines by these agencies further depress the residential market which in turn will impact the commercial market through a trickle-down effect?

All these questions and no answers; wish I had a crystal ball!

I invite you, reader(s), to share your comments on this post. Maybe we can figure it out together. I’m personally feeing the effects of this questionable time in my appraisal practice. I’ll probably be a little cautious in using the market indicated lower capitalization rates when valuing properties…….it’s all about the Fundamentals!

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The most important thing you can do on May 30, 2011……

May 28, 2011
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Monday, May 30th is Memorial Day. As appraisers and others take this vacation day, let us remember that it is not just another of the many vacation days we celebrate here in the U.S.   The most important thing you can do on Monday, May 30 – Memorial Day – is to honor those American veterans that made the greatest sacrifice.  Remember, they made this sacrifice so that you can live in our free and democratic society.  They gave us the freedom to buy, sell and value real estate. Your backyard BBQ and all other activities on Memorial Day are not as important as honoring our brave military service-members that died in the defense of our country.  This should be passed-down to our children and grandchildren by their parents and grandparents.

Here’s a bit of the history of Memorial Day

Memorial Day, which falls on the last Monday of May, honors the men and women who died while serving in the American military.  Originally known as Decoration Day, it originated in the years following the Civil War and became an official federal holiday in 1971.  Many Americans observe Memorial Day by visiting cemeteries or memorials, holding family gatherings and participating in parades.  Unofficially, it marks the beginning of summer.

Each year on Memorial Day a national moment of remembrance takes place at 3:00 p.m. local time.

Memorial Day was originally known as Decoration Day because it was a time set aside to honor the nation’sCivil War dead by decorating their graves. It was first widely observed on May 30, 1868.

During the first celebration of Decoration Day, General James Garfield (a great, great, great grandfather of my husband) made a speech at Arlington National Cemetery, after which 5,000 participants helped to decorate the graves of the more than 20,000 Union and Confederate soldiers buried in the cemetery.

By the late 1800s, many communities across the country had begun to celebrate Memorial Day.  After World War I, observances also began to honor those who had died in all of America’s wars. In 1971, Congress declared Memorial Day a national holiday to be celebrated the last Monday in May.

The largest traditional Memorial Day observance to honor our veterans in the East Bay takes place in the Town of Danville at 10:30am on Monday – May 30 at Oakhill Park on Stone Valley Road (next to Monte Vista High School).  Some of you may know this park as the site of the All Wars Memorial – a beautiful & educational memorial honoring our military, veterans and patriots from all wars. My Dad and my husband’s great, great, great grandfather, father and numerous other veterans are memorialized in the granite pavers creating a walkway to a reflecting area at the top of a hill. It is a place where I can go to remember my Dad, a WWII veteran who passed away years ago, but lives still in my heart.

So as Monday rolls around I sincerely hope you take some time to remember that the price of freedom is not free.  All gave some…  Some gave all.  On Memorial Day we remember our country’s veterans – all who served, some of whom paid the ultimate price for our freedom.

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Honoring My Mentor

May 25, 2011
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Is it possible that my mentor, Jim Goodhue, MAI (retired), turned 90 this month? So I’m told by his former secretary at Adobe Savings, Debbie Stanley. Where did all the years go since I first met him in December 1980 as an interviewee for a research assistant’s job with his appraisal practice, Venture Research? Yes, it’s the same name as my company. You see, I purchased Venture Research from Jim in 1997 when he decided to retire in stages.

Jim Goodhue is known and revered by many in the commercial appraisal industry for his mentoring, teaching of appraisal classes, and fine appraisals and consulting.  A look at his appraiser qualifications from an old report we did together reminded me that he started his path to the practice of appraisal in much the same way I did, as a segue.

Jim Goodhue got his BS in engineering from the prestigious MIT in the 1940’s.  Much later, in his constant quest for learning, he went to St. Mary’s College and earned his MBA in 1982. Jim worked in the engineering field first as a licensed architect and engineer, with a firm he owned committed to these practices before moving into the appraisal field around 1960. Hopefully, I’ve remembered his history correctly.

I could go on and on about his achievements, of which he and his family should and I’m sure are very proud.  But back then to me Jim represented a new avenue for my curiosity; a chance at a new career in my new found home state of California. I answered an ad in the newspaper in late 1980 for a research assistant for his appraisal firm, Venture Research. I was interviewed by then employees, Jim Shaw and BJ Diehl, as well as Jim himself. I found a fit for the former New York State teacher with a couple of English degrees in the land of post Prop. 13.

I was encouraged to find out more about appraising by Jim; to see if this was a job or a career move for me.  I took my first appraisal class at DVC (DiabloValleyCollege) the next year and liked it. Subsequently I worked through all the classes required for an MAI designation back then. I rode along with one of the residential appraisers in the office, Jim Hugus, and accompanied Jim Shaw on a number of appraisal assignments, all the while learning, learning, learning!   

I guess Jim Goodhue saw potential, as he soon had me working on land appraisals.  The rest, as they say, is history!

One discussion that I will never forget that I had with my mentor, Jim, was on the subject of rounding in an appraisal report. I got to my values via the different approaches and was exact to the nearest dollar. Jim reviewed my work and asked me when I became god that I could be so precise? That is the day I learned about ranges and that rounding to the nearest $10,000 was more realistic for valuation purposes.

Sadly, I left Jim’s Venture Research in mid-1985 to remarry and move to Southern California. I left, but I returned. In 1990 when I started my own appraisal practice I did subcontract work forJim Goodhue. That lasted until 1997 when the name Venture Research transferred to me. 

I never did get that MAI designation, due to personal time and financial limitations, but along the way I did gain a wealth if experiences working for not only Jim, but a number of other MAI’s in fee and corporate appraisal positions in both Southern and Northern California.  During that time, when given the opportunity, I tried to be a mentor to those appraisers just getting started in the field, just like my mentor, Jim Goodhue, had done for me.

I salute you, Jim Goodhue, for your continual mentoring of young appraisers throughout your long career; for your never-ending support, achievements, and longevity.  I thank you for my start in the field of commercial appraisal. I hope I always live up to your standards and expectations.

Belated happy birthday wishes, with appreciation and respect!


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When does it end? …….When does it start?

May 11, 2011
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If you are like me, you read and hear a constant barrage of what’s happening in the local and national economy.  For the last several years it hasn’t been very good news. Like most, if not all professions, appraisers have been impacted by changes wrought from the recent past and current economic climate. It continues to happen with what seems all too much frequency. I’ll give you a few examples.

 When does it end?

When the market/real estate market took the initial turn downward, probably sometime in late 2007 to early 2008, but officially in about 3rd quarter 2008, the impact to appraisers was pretty fast.  Lending to commercial real estate investors all but stopped….so real slowdown in lender appraisal work. 

Attorney General of New York, Andrew Cuomo, back in 2007 and even perhaps a little before that, started looking at the issue of appraiser independence. There is a well known ethical standard within the appraisal community that appraiser independence needs to be maintained at all times. Unfortunately, in too many instances prior to the market downturn, there was pressure to either come forward with a prescribed value or condition statements or other conclusions in the appraisal which were marginally, or not at all supportable.  It became a real pain to field calls from loan agents asking appraisers to push the value so they could make the deal! It took determination on the part of the appraiser to stand his of her ground and say NO! I’m sure I lost some lender appraisal work during that time as a result of maintaining my appraisal independence.

The result was the HVCC (Home Valuation Code of Conduct) which died a timely death in early 2010.  We are still left with AMCs (appraisal management companies) that were created in an effort to cut the communication links between lender loan originators and appraisers. These middle management type firms work for major, larger lenders to fee out appraisals to a fee panel of approved appraisers.  Granted, these mostly impact residential appraisers, but there are many AMCs that fee out commercial appraisal work as well.  The fees are often lower than paid by other users of appraisal services and the turnaround time required is often very short.  Sometimes the only appraisers willing to work under these conditions are from other areas and unfamiliar with the locale where their subject property is located. This sets up a whole new bunch of problems relative to area knowledge competency…….and the list goes on!  Wonder how come so many experienced appraisers shy away from AMCs? Wonder no more.

The following was announced in 4th quarter 2010:

” Federal Reserve Board Announces Appraisal IndependenceRequirements

On October 18, 2010, the Federal Reserve Board released an interim final rule on appraiser independence. The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203). In their release, the Fed states that the purpose is to “protect the integrity of the appraisal process when a consumer’s home is securing the loan.” The interim final rule covers a host of appraiser independence issues, including reasonable and customary fees. Comments on the rule will be due 60 days after publication in the Federal Register, which is expected shortly. Compliance to the rule will be mandatory as of April 1, 2011.”

This was supposed to elevate fees from unreasonable to reasonable, but the jury is still out on whether or not this will be true.   Seems to me, as long as there is a middle-man in the process that has to be paid, the provider of the service is giving up some of the potential profit in the transaction.  There is also the question of oversight as in who reviews the work done by the fee panel appraiser for quality control? Lots of kinks to work out to make this process work the way it should.

Bottom line is that there is less lender work for appraisers due to the more stringent lending guidelines now in place, the lack of qualified borrowers who meet the new guidelines and the closed fee panel lists of AMCs, if you really want to work for them.

None of these has been particularly good for the business of appraising from this appraiser’s point of view.  Lower fees, faster turn-around and less oversight, all in a market where comparables are scarce and motivations of the parties to the transactions questionable – REO, Quick Sale, or Market Rate transaction – making the development of a credible appraisal product harder than ever! Oh, if only all appraisers had maintained their independence!  Our work world may be a different place today.

 When does it start?

Really, really trying to be apolitical here, but regulation upon regulation doesn’t appear to be helping in any economic situation today.  Appraisers on the whole, I suspect, would love to have their oversight from one of their professional organizations such as the Appraisal Institute or the American Society of Appraisers, along with their state licensing agencies, currently OREA (Office of Real estate Appraisers) in California, and the Appraisal Foundation (federal) .  Most recent news in CA is that there are plans in the works to combine the OREA with the association of the DRE (Dept. of Real Estate). Not sure how that will increase appraiser independence. Brokers want there properties to sell for the highest price possible to make a higher commission on the sale…..whereas appraisers, well that’s already been addressed. Will it really save the state money?

Lenders are just now (how many years later?) starting to be more proactive on making commercial property loans. However, with the number of qualifying borrowers diminished in the marketplace, finding one to make a loan to, I’m told, is often difficult.

Upside down commercial loans have been extended (again for how long?) and the lender community is still coming to terms with what to do with these properties. Ok….so not much lender work…still.

Many of us in the appraisal business have, over the last several years, opted to seek employment (fee appraisal work) from alternative users of valuation products. These include attorneys for litigation support as expert witnesses, non-profit organizations such as Habitat or Humanity, estate appraisals for tax purposes, partial interest valuations for partnership dissolutions, and public agencies such as land trusts.  I have found that these alternative sources of work potential are often more interesting and in a lot of cases more challenging. I personally like to be challenged!

But all things considered, until the state and local economies pick up and jobs are created, creating the need for more space/buildings to be purchased or leased,  and the hoarded money of investors comes out to play again, the outlook for my profession still looks a bit gray.

Better news on the horizon? I’m really hoping so, but with cautious optimism. Give me a challenging valuation problem with a decent fee and long enough to do a credible appraisal……I’m ready, but is the market?

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The Beginning

April 30, 2011
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I’ve been meaning to start a Blog for some time now. There are lots of articles, videos and general information sources out there on the benefits of using social media to get your point across to…..whomever. My daughter, Samantha, who is an aspiring tween book author, has had her blog for a while now – Flipsidefinds. So….with her encouragement and a bit of help, here I go!

My blog speaks to my experiences as a commercial real estate appraiser and consultant. I have been in this business for about 30-years now, jeez, where did the time go!? For the last 11-years I have been an independent fee appraiser dba Venture Research.  Along with all these years of appraisal experience, I’ve developed some viewpoints and opinions.  I have also lived and worked through some tough recessionary times and survived!  Does this make me an authority, well no, but it has helped to make me insightful. In our changing world, which seems to change at lightning-fast speed these days, appraising is changing too.

If you have an interest in the world of commercial real estate appraisal either as a practitioner, user of appraisal services, or just a plain old curiosity about appraisers, I invite you to follow my blog and from time-to-time as the topic speaks to you, let me know your thoughts.

Welcome to my blog….Reese’s Observed Conditions.