Magazine article Journal of Commercial Lending

How to Hire the Right Appraiser

Magazine article Journal of Commercial Lending

How to Hire the Right Appraiser

Article excerpt

The appraisal profession exists because real estate markets are inefficient. No one hires an appraiser to provide an opinion of value for General Motors stock or for a gallon of milk. An active and efficient market (such as publicly traded stock or groceries) provides these answers without outside assistance. Because real estate markets are inefficient, the research and analysis required to appraise real estate are highly labor-intensive. However, given the time-consuming nature of their tasks, appraisers are not more expensive than other professional service providers. More important, the cost difference between a useful and a useless appraisal can be very modest.

What to Look For

Your first priority should be to find an appraiser with appropriate experience. Although this statement is a truism, it is not as simple as it sounds. How do you evaluate experience? The key is to find someone who understands real estate markets - how markets work and how they do not work.

An understanding of markets is the essential and most important expertise that a professional appraiser can claim. Certainly, you want an appraiser who is knowledgeable, and most appraisal knowledge comes through experience. However, knowledge and experience are not the same thing. An appraiser may acquire particular experience without gaining useful knowledge from it.

As part of your evaluation, ask your prospective appraiser to identify one or two significant assignments undertaken within the past year. Then, as a follow-on question, ask what particular knowledge was gained from this experience. The appraiser's response may indicate if he or she is capable of learning through experience. Alternatively, the response may reveal an appraiser who simply got the job done. This approach is exactly what you do not want for your own assignment.

Communication Skills

You will want an appraiser who can communicate effectively. Most commercial appraisals are communicated through written narrative reports. To evaluate a potential appraiser's communication skills, ask for one or two sample appraisal reports. Unfortunately, an appraiser has a duty to protect the confidentiality of clients and the results of previous appraisals. Consequently, the reports provided by the appraiser will be "sanitized." Much of the "good stuff" will be (properly) missing, making them difficult to evaluate.

However, there is a practical way out of this difficulty. You can request a neighborhood description and a market overview section of an actual appraisal report. It is unlikely that these sections will contain sensitive material, and therefore, the appraiser can responsibly forward the complete sections without deletions. In addition, careless appraisers often disclose their lack of care and understanding in these sections.

Depending on the property type, a neighborhood description covers different issues. Common elements include the following:

* Proximity to the central business district and the nearest major airport.

* Expressway access.

* Predominant land uses.

* Compatibility of the subject property to these land uses.

* Availability of support facilities.

* Extent of vacant land.

* Development trends and any ongoing changes to land use.

Most important, the appraiser should conclude with an evaluation of neighborhood trends.

Issues addressed in a market overview generally include the following:

* Identification of the relevant market or submarket.

* Absorption and leasing activity.

* Vacancy trends over the past one to three years.

* Current and proposed new construction.

* Current renewal rates and the change from the previous year.

* Prevailing concessions and tenant improvement allowances.

A summary statement should describe the overall strength or weakness of the market and the current direction or trend of the market. …

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