What do appraisal clients need in appraisals? Their needs are two-fold; service and quality. Last month I discussed the importance of good customer service throughout the appraisal development process. This month let’s talk about some quality basics.
As an appraisal reviewer for over 25 years, I look at appraisals with an eye toward what is right in the appraisal report. That said, there are certain basics that should be reflected in every appraisal report. The goal is to have a well documented, fully supported appraisal. While this is certainly not a comprehensive list, these are some of key components.
First, (and I can’t believe that I have to mention this) is that all exhibits in the appraisal and the addenda must be clear and readable. The resolution on inserted graphics (charts, DCF’s, maps, graphs, pictures) should be the as clear as the text. Blurry graphics do little to support an appraisal opinion.
Almost every appraisal begins with an analysis of the local economy. While many regard this as “boilerplate,” the economic analysis sets the foundation for demand projections later in the appraisal. Population growth, household growth, job growth, unemployment and major industries are all key to property performance. Consider the Intended User of the appraisal. Is the Intended User local with a solid grasp of the area or a distant institution with little local knowledge? Tailor the analysis accordingly. Also, make sure all statistics present the most current data available.
The market analysis should also consider the Intended User of the appraisal. A local client may understand the nuances of one office submarket over another but for distant clients this must be detailed. Still, there are market basics that should appear in every appraisal. These include:
• Inventory: How much space is there currently in the market?
• Vacancy: How much space is available? Consider indirect space as well.
Absorption: How much space is the market consuming?
• Planned and Proposed Construction: How much space will be added to inventory?
• Rental Rate Trends: At what rate are rents increasing or decreasing?
These statistics should be granulated from the greater market to the submarket to the micromarket.
Comparables should be recent and relevant. The definition of recent and relevant is particular to property type and location. Specialty properties or areas with less active trading may have a wider data set than basic properties in active markets.
Adjustments should be consistently applied and reasonable. If there appear to be excessive adjustments, perhaps it is because the comparable is not really a comparable.
The numbers should tie throughout the Income Approach. The Base Rent Projection should be pretty close to the total revenues at the bottom of the rent roll. This is not always the case, but if not, the variation should be understandable from the text (i.e. a major new lease has been secured or there is a scheduled lease escalation). The absorption scheduled should be spelled out. Projected reimbursements should bear some relationship to historical reimbursements or anticipated base years.
Automated DCF programs generally get the mathematics correct but they are only as accurate as the data that is input. Be meticulous about lease abstracting.
Think about risk in selecting overall capitalization and yield rates. Do the rates reflect leasing and economic risks appropriately? Discuss this thoroughly.
Finally, proof read the appraisal. Enough said.
A well documented and supported appraisal should paint a vivid picture of the property, the market and the economics. Clients should be able to understand the appraiser’s perspective without an extensive follow up in the review process.
Karen Friel, MAI, MRA, is the 2017 president of the Massachusetts and Rhode Island Chapter of the Appraisal Institute and principal at Friel Valuation Advisors, Carlisle, Mass.