What is an Appraisal?
A real estate appraisal is an estimate of market value as of a given date, performed by a qualified and certified or licensed real estate appraiser.
What is market value?
Market Value is defined as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale. It is assumed that the buyer and seller are typically motivated, well informed or well advised and each acting in their own best interest.
Who can prepare real estate appraisals?
A real estate appraisal should be performed by a state certified appraiser or licensed real estate appraiser. Other qualifications to consider would be amount of experience in the local marketplace, quality of referrals, and affiliations with local professional organizations.
What is an appraisal “fee shop”?
Most appraisal firms today are “fee shops”. Fee shops are appraisal firms running under a pyramid system where the fee shop owner has less experienced subordinates running around doing the work for them for a fee split of 40% to 50%. In order to pay the fee shop subordinates a reasonable fee split the lead appraiser has to charge higher fees and manage at least four associates to be a financially feasible enterprise. In order for the fee shop appraiser to review the work of the four associates an extra week or two is typically required for each report. In addition, so much review and deskwork is required to run a fee shop that in many instances the signing appraiser (the appraiser that takes responsibility for your appraisal) rarely inspects many of the properties he is signing off on. As difficult as this may be to believe, this is the typical system in place today. By going with a non-fee shop, right off the bat, you move from having a less qualified person meeting with your client and doing the report, to a highly qualified person, a more competitive fee, and typically a shorter turn-around time.
What makes Chandos Pacific better than most appraisal fee shops?
Chandos Pacific is better than most appraisal fee shops because it is not an appraisal fee shop. The signing appraiser personally inspects all properties and conducts all key research. This is essentially a philosophic split from the fee shop business model. From our perspective, the fee shop model is detrimental to clients as it increases the opportunity for confusion, error and professional liability.
What is positive about this is a licensed professional meets with your borrower every time. Should questions arise, there is no third party, or unlicensed junior associate involved. You can call in to check on the status of your project and speak directly with the person handling your transaction verses the larger fee shops where the partner has to refer questions out to the sub-contracting associate. We keep things simple by doing fewer reports for select clients.
I have heard appraisal firms are conservative. Does this mean my appraisal will be low?
No. Appraisers bear liability both ways – if they under appraise a property they assume liability if the owner sells the building for too little. They have a vested interest in looking at both high and low sales and going right up the middle. In a rising market they will tend to place emphasis on the higher/most recent sales. In a falling market they will tend to place emphasis on the lower/most recent sales.
Will my property appraise for what my loan officer indicated?
Generally speaking, yes. However, it is actually against the law for an appraiser to accept an appraisal assignment based on a contingent value, thus all preliminary values provided to you by your bank are just that, preliminary. In practice, loan officers typically have carefully established their own internal value estimates in great detail before your report is ordered. If all the information provided by you to the bank at the time the report is ordered is found to be accurate, then our findings should be similar.
The only instance when your report could be significantly lower in value is if the square footage of the property turns out to be notably less than originally reported, if leases in place are significantly higher than what surrounding properties are leasing for, or if a construction company has provided you with a substantially inflated construction bid. Typically most brokers and owners know if their leases are at market and the size of their buildings so this is a very rare occurrence.
What is USPAP?
USPAP stands for Uniform Standards of Appraisal Practice. USPAP is a set of rules that govern the way appraisals are to be prepared. It is approximately 90 pages of detailed standards that cover ethics, the reporting process, and consultation and personal property appraisal. USPAP is published each year by the Appraisal Foundation, based in Washington D.C., and appraisers are required to regularly attend seminars keeping them up to date with USPAP changes. A federal law stipulates that appraisers be licensed by the state in which they practice. California state law requires that appraisal reports adhere to USPAP, and the State of California regulates and licenses appraisers that practice within the state. More information may be found at www.appraisalfoundation.org.
What is FIRREA?
The savings and loan crisis led to significant legal reform in the late 1980s. The reform enacted by congress is referred to as the Financial Institution Reform and Recovery Act (FIRREA). FIRREA essentially took over the regulation of the appraisal industry and gave it to the individual states based on new terms and requirements. FIRREA left the private appraisal organizations somewhat displaced. The Appraisal Institute (the MAI group) almost went bankrupt and nearly shut its doors, then finally merged with several other appraisal groups and continues to be a leading provider of appraisal education.
Appraisers licensed post-FIRREA had to meet stricter terms to obtain licenses with the state. Chandos Pacific Appraisal is a post-FIRREA firm that obtained its educational course work through the Appraisal Institute and is a member of the Foundation of Real Estate Appraisers and an Associate Member of the Appraisal Institute.
Older firms tend to be pre-FIRREA firms and the members typically advertise and promote their appraisal organization membership. Note that none of the private appraisal groups govern appraisers, only the state in which the appraiser practices has the right to issue appraiser licenses and oversees all appraisal activity. As you can see, over two decades ago, before state laws became uniform in requiring all appraisers to be audited, trained and tested, private memberships were the only means a bank had of establishing if an appraiser might be qualified. Times change and so have lending regulations. If your bank stipulates your appraiser must be a member of the Appraisal Institute, the Foundation of Real Estate Appraisers, or any other appraisal group, it is actually in violation of FIRREA and federal banking regulations. The Federal and State government currently have ruling authority over appraisal regulations in the United States.
What is an MAI appraisal?
There is actually no such thing as an MAI appraisal. There is an organization called the Appraisal Institute that offers classes and created a designation called an MAI, which stands for Member of the Appraisal Institute. Prior to the savings and loan crisis there was limited regulation in the appraisal profession and, as such, a membership in a professional organization was a means for banks to insure an appraiser was generally competent. In response to the savings and loan crisis, in 1989 the federal government stepped in and instituted FIRREA, a major financial reform act which made the state governments responsible for appraiser certification and oversight. As a result of this legislation each state is now auditing the experience, education, and appraisal reports of appraisers before they are licensed and most of the states require course work very similar to the Appraisal Institute, along with report audits, and a comprehensive exam. Per this legislation it is unlawful for any FDIC bank to require any of its appraisers to belong to a specific appraisal organization because the federal government was concerned about the government and states being the primary authority over appraisers and the lack of minorities being accepted into the private appraisal organizations and professional fraternities. All FDIC banks must adhere to FIRREA.
Financial Institution Reform and Recovery Act
What is an MAI appraiser?
An MAI appraiser is a certified general real estate appraiser that is a Member of the Appraisal Institute. The American Society of Appraisers is a similar organization with the ASA membership designation. These are supplemental memberships that certified general appraisers may pursue in addition to their state certification.
What if my appraisal is for less than I anticipated?
No one is more interested in you having an accurate appraisal than we are. If for any reason you feel your appraisal is too low or too high, Chandos Pacific has an open door and open file policy. We will forward all comparable research and information to your office for your review – and carefully consider any information you believe we may have over looked with no questions asked. We want all clients to be happy with our work and are glad to take the time to insure our findings are accurate and clearly understood by anyone relying on our reports.
If I am not happy with my loan package can I take my appraisal to another bank?
Not without the bank’s permission. Commercial appraisals are ordered by the lending officer and bank to establish agency with the lender, not the borrower. As strange as this may seem to some borrowers, even though they may have paid a fee for the appraisal, the appraiser’s fiduciary duty is to the bank that ordered the report (client that established agency) not the loan applicant. The appraiser may not even tell the borrower the value of the property over the phone. It is against the law for them to do so. Appraisers are required by law to report this information to their client and only their client.
What kind of client are we at Chandos Pacific interested in?
Our business model only works well with lenders, attorneys, investors and CPAs looking for highly ethical and accurate reports. This means legal and condemnation clients seeking to fairly resolve disputes. One reason we do so much work for Fortune 500 companies is that we tend to prevent litigation between these companies and their long-term tenants. These tenants are often investing millions in improvements on land they are leasing, while the companies are often entering into 20-year land leases. A well document and fairly prepared report means no disputes or future complications.
On the banking side we need committed, well-organized, lenders serious about the closing process and providing excellent long-term service in the market place. Loan officers experienced with managing borrower expectations and the appraisal exhibits required to prepare a report allow us to do our best work.
In turn, borrowers that are happy with the appraiser they meet with tend to be happier with their bank. We believe we can add significant value to the business practices for clients of this nature – and our clients tend to be long term and happy.
What Are The Three Approaches to Value in The Appraisal Process?
Commercial real estate can be measured by applying three traditional approaches to value:
• The Cost Approach
• The Income Approach
• The Direct Sales Comparison Approach
The Cost Approach is utilized where significant structural improvements have been created consistent with the highest and best use of the land. This follows the principle of contribution where the improvements add value to the underlying site. In this approach, the appraiser first estimates the value of the land by comparing it with similar sites that have sold recently. The replacement cost of the structure as new is estimated using cost data sources and contractor’s estimates. Depreciation from physical, functional, and external causes is then subtracted in order to obtain the depreciated cost of the improvements. The land value is then added to indicate the total value by this approach. The Cost Approach is most relevant to recently constructed and special purpose properties. In cases where the improvements are older and are significantly affected by depreciation, the Cost Approach has decreased relevance. The Cost Approach may be used to establish and insurable value. Components of the Cost Approach may also provide relevant information with which to establish adjustments in the other two approaches.
The Sales Comparison Approach is based on the premise that transactions between independent parties buying, selling, developing and utilizing real estate are evidence of the value. This valuation method involves a comparison of the subject to sales of similarly improved properties, adjusted for measurable differences. When sufficient sales data exists, this approach can be the best indication of market value. This approach is considered most applicable for owner occupied and special purpose commercial properties.
The Income Approach is used in valuing properties that produce an ongoing income stream that is capable of attracting investors. The conversion of the anticipated income stream into value is called capitalization. Investors trade present dollars for the right to receive the future income stream based on the perceived risk associated with the income stream.
Several techniques of capitalization are available including Direct Capitalization. The Direct Capitalization method, which is the most common Income Approach method, involves the conversion of a single year’s income into a value indication. Assumptions are made for stabilized levels of income, vacancy, and expenses. The resulting value represents the present value of the anticipated future cash flow allowing for an equitable return to the investor. This approach is considered to be highly applicable and pertinent for multi-tenant income producing commercial properties that have traded for investment purposes.
What is insurable value?
Commercial banks typically will want a determination of your commercial property's insurable value as well as its fair market value. The insurable value pertains to the replacement cost of the improvements. The insurable value does not include the underlying land value or site improvements. This value is based on a construction cost estimate of your property and may be required in order to insure there is proper insurance coverage for your property.
What is ADA compliance and why is this important to commercial property owners?
ADA compliance refers to the American's with Disability Act. This Act requires that commercial properties that conduct business with the public must provide reasonable access for people with disabilities. This means a dedicated parking space, path to entry, and sidewalks and doorways that allow wheelchair access. Property owners that do not comply with this regulation may be subject to formal legal complaints. An ADA consultant is recommended to insure that your property is compliant.