Art or science?
Most business owners and their advisers are occasionally dependent on commercial property appraisals. “Bewildering” sometimes describes the process ... and the outcome. The types and sources of appraisals are as confusing as the regulatory environment has become in recent years — for appraisers beholden to their state licensing and professional organizations, and for lenders, lawyers, brokers and others who turn the wheels in real estate. Whether appraisals are the product of tried-and-true academic methods or some vague, facile art form has long been debated in real estate venues. So, are appraisals art or science? The simple answer is both.
The appraisal review function has rapidly grown in importance. This sea-changed economy with few historical precedents and so many unknowns has raised property owner and lender risk levels. Appraising complex assets with meager transaction data in a persistently dispassionate real estate market has raised the bar for appraisers and reviewers in the provision of reliable valuation services. But, timely and focused appraisal review separates the wheat from the chaff. It has become crucial for large, complex or unique assets where a lot is at stake and long-term decisions are made. And, for going concerns, the appropriate identification and separate valuation of realty, personal property and intangible assets is particularly demanding.
As a career appraiser, reviewer and adviser, I offer some observations about the appraisal review and counseling process. There are fewer obvious benefits of the process beyond peer review, quality control and regulatory compliance. Our most recent recession has illuminated some continuing inconsistencies in the quality and reliability of some appraisals — even with the mind-numbing array of guidelines starting with the Uniform Standards of Professional Appraisal Practice created back in 1987. How do appraisers, much less business decision makers, make sense of it all?
Appraisal review and consulting services provide one way. The extent of a review can be limited or broad depending on the complexity of subject property appraisal issues. A technical review of an appraisal should involve a thorough and constructive critique of the appraiser's work product and conclusion. A reviewer can also evaluate an oral appraisal report, file memoranda or portions of an appraisal. Individual or portfolio assets can be reviewed at different geographical locations far from the reviewer's home base. The reviewer and client must agree in advance on a USPAP-required “Scope of Work” to insure reliable, unbiased results.
The required technical methods and judgment contribute value by completing due diligence and supporting owners and their advisers in fulfilling their fiduciary responsibilities. To most investors, a competent, professional appraisal is a welcome part of a prudent asset management process. An evaluation of that work product by an appropriately experienced reviewer should mitigate risk, provide effective communication among all of parties and lead to greater confidence in decision making.
So, the appraisal process does require an adept combination of science and art. The “science” part is the gathering of appropriate market information and the use of time-tested and often complex valuation methods developed and refined by the appraisal industry. The “art” part is the judgment that is required at many steps along the way to reconcile often conflicting results and inconsistent market information into a reliable value conclusion. The increasing use of automated valuation models risks marginalizing the important role that judgment plays. The reviewer and counselor provide a common-sense safety net.
What are characteristics of the best reviewers and advisers beyond education, experience and competence? In an industry with tight deadlines, a paucity of transaction data and the huge amount of detail in the appraisal process, mistakes are inevitable. Perfection is not a realistic goal. A good reviewer focuses on key issues in the real estate analysis that either lead to a credible, reasonable conclusion or require a leap of faith to a dubious one. A good reviewer can communicate effectively and empathetically with the original appraiser, recognizing the strong points and providing constructive criticism where warranted. A professional reviewer wants to be part of an appraisal solution. The Appraisal Institute's professional designations, MAI for commercial property and SRA for residential, signify excellence in appraisal education, experience, and professional conduct.
Seasoned appraisers, reviewers and advisers play an important, multi-faceted role serving financial institutions, corporate executives, attorneys, municipalities, government agencies and others. For example, in a lawsuit, a reviewer can objectively critique another appraisal; prepare a new one; explain methodologies and semantics; assist in preparation of interrogatories; evaluate depositions; interpret oral testimony; provide additional research and analysis; and testify as an expert witness. Strategic counseling and support for attorneys can significantly influence litigation outcomes.
We are in an uncertain and competitive marketplace with rapidly changing rules and technology. Property owners need plenty of knowledge at the table. Seasoned professionals can enhance appraisal consulting services with perceptive analyses; creative and practical solutions; and astute assistance for strategic planning, management and disposition of assets.
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