Most improved real properties and many vacant tracts can only be sold subject to existing easements. Appraisers identify existing easements and consider their effect on value whenever a market value definition is part of an assignment. Easements and rights-of-way often influence how real property can be used and may even affect a property’s ownership cost.
It’s standard procedure for most commercial lenders to request all three approaches to value—sales comparison approach, income approach, and cost approach—be undertaken during an appraisal. Usually, there is a stipulation that an approach may be excluded from the valuation if such an approach is deemed dispensable. This omission can be a point of conflict between lenders and appraisers, as the necessity of one or more approaches is debatable in certain situations. This post attempts to clarify the instances where the cost approach is either relevant or extraneous to a property’s valuation. Being able to prudently determine the importance (or otherwise) of the cost approach to valuation increases efficiency and fosters understanding between lenders and appraisers.
The Market Analysis section in an appraisal report contains precious information that directly influences the value of a property and also provides priceless insight into a myriad of data relating to the financial feasibility of a property. It is common for many prospective users of an appraisal report to ignore various sections of the report and focus solely on segments that indicate property value. The downside of this approach to valuations is that the reader, therefore, misses key insights into the subject market that can benefit the owner, buyer, seller, or lender.
Choosing an appraisal firm to handle your sensitive commercial and residential valuation needs in Massachusetts is an important decision. When considering lending money, or working with a third-party that will rely on your appraisal, it’s critical to ensure that the valuation is accurate, credible, and reliable. A faulty or biased report has the potential to setback your operations, result in missed opportunities, and damage your reputation. Read on to gather some essential advice for selecting your next appraiser.
Many Massachusetts valuation clients choose to work with appraisal management companies (AMCs) due to the fear of compliance issues with Dodd-Frank and the Consumer Protection Act. It’s a common misconception that to avoid bias issues, and maintain transparency, that you have to use an AMC. For a brief period after the financial crisis of the late 2000s, it was the case that some parties in the real estate business were required to use management companies as intermediaries, but those limitations expired when the Home Valuation Code of Conduct restrictions went out of effect. You now have the option to hire the most experienced, dedicated, and professional appraisers in the subject property’s local market.
Long-term Savings, Reduced Risk, Less Wasted Time, and Local Expertise
Choosing to work with an expert local appraisal firm in Massachusetts, and the greater Boston community, will allow you to cut out the middleman. Appraisal management firms have taken advantage of limitations created by legislation to build their market share. Independent firms have to go the extra mile in everything they do to build their competitive advantage and provide the greatest value to clients. AMCs aren’t compelled to provide excellent service or strict quality control, as they rely on industry fears and misconceptions.
Independent firms offer greater value by eliminating the excess fees and costs incurred by management companies that do little to merit the additional costs. The typical AMC quality assurance process takes 1-3 weeks, after inspection, before you receive your completed valuation report. When errors slip through, you’ll typically be left waiting another week or two before your revised report is ready; whereas, a reputable independent team of appraisers will deliver a more reliable and detailed report the first time, with prompt turnaround (48hrs), and rarely-needed revisions ready in hours or a day, rather than weeks.
When you’re working with third-parties that will rely on the content of your reports, it’s especially critical that valuations be accurate the first time. Every time a report is rejected, it incrementally diminishes your credibility and can lead to lost business opportunities, financial loss, and damage to your reputation. Impersonal management firms don’t place much emphasis on customer service and will often discourage and scorn you for suggesting that their reports contain errors.
A major advantage of selecting an independent appraiser is the greater level of local market expertise and the ease of communications. Dedicated local professionals take extra time to understand and research their markets. Appraisers that rely on orders from AMCs can become complacent in their research and diligence, and will take reports in any market, regardless of their actual knowledge of regional market factors.
Reduce your risk, expense, and improve your customer experience by selecting and working directly with a local, family-owned firm that genuinely cares about your business and its success. If you’re accustomed to the AMC model, you will be astonished with how efficient and positive your experience is when you work with a team of Massachusetts specialist appraisers that put quality and customer service first.
How do you know if you’re making the most money possible from a property? Are you getting the greatest economic and functional value from your investment? How will the long-term value of the property be affected by zoning changes, new developments, and the usages of surrounding properties?
Highest and best use analysis considers these issues and provides indicators of how the value is, and will be, influenced by emerging local market factors. When you understand what usage of the property is likely to produce the greatest value over time, you can formulate development and disposition plans that will yield the greatest ROI, and reflect the most positively on your Massachusetts investment portfolio and resume.
An appraisal is more than just an estimate of value for the subject property. It provides unique insight into a local real estate market and how a broad range of social, economic, and structural properties influence value. A property valuation is also a critical tool in lending and investment spheres that is relied upon to determine risk and make decisions with financial ramifications that extend into the millions and can create substantial operational issues when faulty. In this article we’ll talk about the key things to look for in interpreting the accuracy and quality of a commercial or residential appraisal.
Level of Detail and Accuracy
The first thing you’ll notice when reviewing an appraisal of any type, is the level of detail that the appraiser puts into the report. When you’re reading it through, what questions come to mind? What has been left unanswered? The mark of a quality appraisal is a thoroughness that addresses the market issues that are most relevant. If the subject property is in a market that is experiencing a withdrawal of industry, economic decline, or a surge in housing starts, the issue should be clearly addressed with explanations of how it affects the property’s value.
If you notice obvious errors in the property’s characteristics, you can be sure that other less obvious inaccuracies may be present. Although not an indicator of the appraiser’s market knowledge, typographic and grammatical errors can indicate a lack of diligence on the part of quality assurance staff. These small things can reflect poorly on your company and diminish your reputation with partners.
Clear and Well Supported Comments
While appraisals are sophisticated documents, they shouldn’t be obscurely worded or difficult to understand. When a claim is made regarding the market, or other influences on the property, it should be backed-up with solid market data and explanations as to their relevance. The purpose of a valuation is to provide an opinion of value as of a certain date and provide the context and reasoning behind the estimate. When the cost and income approaches are utilized, particularly in a commercial appraisal, extra time should be taken to explain the capitalization rates employed and how the value was derived.
Whereas residential appraisals primarily rely on the substitution, or market comparison method, commercial appraisals require estimates of value derived from the income and expenses generated, and incurred, by the property’s operation. This requires sophisticated methods that utilize investment trends to determine how the appraiser converted the income and construction cost to a concrete and accurate estimate of value. Not unlike a homework assignment, correct answers don’t score you full points: it’s the depth of the logic, rationale, and market understanding that earns full credit.
The adjustments are the additions and subtractions that appraisers make to the values of comparables based on the functional and economic differences between the properties. This helps narrow the range of possible value for the final estimate. Take a careful look at the amount that the appraiser uses to adjust the differences between the subject and comparables. The scientific method of determining the adjustment amount is termed the Paired Analysis Method.
This approach involves a statistical analysis between two sets of data for properties that are most distinctly different based on the feature in question: ex. pool vs no pool, with all other features being roughly similar. Not every appraiser has the local market knowledge, data, or skill to employ this method, and will base adjustments on informal observation or guess work, leading to grossly inaccurate valuations, a common occurrence when an appraiser’s local market knowledge is lacking. You can use your intuition to determine if adjustments make sense considering the economic direction of the community and value of each feature.
Don’t be afraid to question the reasoning for comments and values; you deserve to be certain of the validity of the report. It’s worth the extra time to carefully evaluate the appraisal before accepting it as final and distributing to any third-parties you’re working with in the transaction. If you need assistance reviewing the report, reach out to a team of expert local Massachusetts appraisers to help you evaluate, and ensure your move forward with complete and accurate information.