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.