{"id":599,"date":"2013-03-29T11:20:21","date_gmt":"2013-03-29T18:20:21","guid":{"rendered":"http:\/\/privatemoneysource.com\/blog\/?p=599"},"modified":"2013-03-29T11:20:21","modified_gmt":"2013-03-29T18:20:21","slug":"how-to-read-an-appraisal","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/blog\/?p=599","title":{"rendered":"How to read an appraisal"},"content":{"rendered":"

Clay Sparkman<\/em><\/p>\n

This article was originally published, on The Private Money Broker Blog<\/a>. on 8\/9\/10. Some two and a half hears later, I feel it is worthy to be modified slightly and published again. Whatever you do in the real estate business, I highly recommend that you give this post a good read.<\/em><\/p>\n

The most important thing that you must understand about any appraisal (or other real estate valuation instrument) is that it is only as good as its logic.\u00a0 So that\u2014in other words\u2014you must never accept an appraisal\u2019s conclusion regarding value without looking beyond the surface to understand the logic that leads to the conclusion and without making some reasonable determination as to the quality of the logical argumentation.<\/p>\n

With that in mind, I offer you ten critical steps to follow when reading\/analyzing (and thus attempting to assess the \u201cgoodness\u201d of) an appraisal.<\/p>\n

(1)\u00a0\u00a0\u00a0 The very first thing you must ask as you analyze an appraisal is to what degree is the appraisal transparent?\u00a0 In other words, how much of the logic leading to the value conclusion is on display for you the reader?\u00a0 If the answer is none, the appraisal is useless.\u00a0 Throw it away.\u00a0 If the answer is some (in other words there are gaps in the logic) then you must either (a) once again, decide to toss the appraisal, (b) decide to accept some degree of uncertainty, (c) attempt to fill the gaps on your own, or (d) contact the appraiser and see if she can provide the missing logic.\u00a0 (Sometimes the appraiser will have the information you need on file, but they just didn\u2019t include it in their final report.)\u00a0 Ideally the answer is none or very little, and the appraisal can be said to be highly transparent.\u00a0 At any rate, you will need to be asking this question throughout your analysis.<\/p>\n

(2)\u00a0\u00a0\u00a0 The next thing you need to do is get a handle on what is being appraised.\u00a0 Is it a home, a commercial building, a parcel of land?\u00a0 What are the basic specifications?\u00a0 Where is it located?\u00a0 Is it urban or rural?\u00a0 How desirable is the surrounding area?\u00a0 Are there functional inadequacies?\u00a0 If it is land, what horizontal infrastructure is in place or lacking and what does the current zoning allow?<\/p>\n

(3)\u00a0\u00a0\u00a0 I have never heard anyone else say this, but I stand by it (at least when valuing buildings and structures; for valuing land, not so much): one of the first things I do after getting a basic sense of the property is go straight to the photos.\u00a0 (And by the way, make sure you have an original appraisal or color copies.\u00a0 The photos can be quite useful, but not if they are blacked out by copying and faxing.)\u00a0 I study the photos of the subject property and then I compare them to the photos of each of the various comps.\u00a0 You will be surprised at how often you will begin to sniff some bad cheese at this point in the process (particularly when dealing with structures).\u00a0 What you are looking for here is: (a) whether or not the comps are in the same general condition as the subject property, and (b) whether or not the comps are in the same general \u201cclass\u201d as the subject property.\u00a0 By class I am referring to the level of quality and distinction of the property.\u00a0 If the answer to one or both of these is no, it is not necessarily game over, but you will now be looking even more closely at the adjustment matrix later on to see if the apparent differences are effectively accounted for to your satisfaction.<\/p>\n

(4)\u00a0\u00a0\u00a0 Next, you will want to check the effective date of the value given.\u00a0 How current is the appraisal?\u00a0 In a steady up economy we used to be comfortable using appraisals that were as much as 1-2 years old.\u00a0 We would adjust the value to be in-line with changes in the market.\u00a0 With the chaos of the past 5+ years, this method is not as effective and must be utilized with great care.\u00a0 Generally speaking (though this would depend to a certain extent on the region) you would want your appraisal to be less than 6 months old.<\/p>\n

(5)\u00a0\u00a0\u00a0 Check carefully to see if there are any \u201csubject to\u201d items associated with the value.\u00a0 Generally this will initially be indicated by checking a box that indicates the appraised value is subject to certain additions, improvements, or modifications as indicated later in the appraisal.\u00a0 This of course is a critical item, so make sure you have read through the entire body of the appraisal so as not to miss any such \u201csubject to\u201d items or conditions.<\/p>\n

(6)\u00a0\u00a0\u00a0 Look to see if any extraordinary assumptions are made by the appraiser.\u00a0 Here again, you will be forced to read through the entire body of the appraisal to be sure.\u00a0 On more than a few occasions I have seen what looked to be a perfectly reasonable appraisal completely neutralized (or actually nullified) at the discovery of one or more extraordinary assumptions.\u00a0 The problem with most extraordinary assumptions is that they are indeed extraordinary.\u00a0 If I am evaluating a parcel of bare land zoned rural agricultural, and an extraordinary assumption in my appraisal states that \u201cThe zoning will be changed to allow multi-unit residential at 8 units per acre.\u201d \u2026 well chances are, the gig is up.\u00a0 Even if some serious local zoning change is in the works, what is the chance that you can count on it to come through and thus turn this \u201cstraw\u201d property into gold?<\/p>\n

(7)\u00a0\u00a0\u00a0 Take an accounting of the methods utilized for valuing the subject property.\u00a0 In my opinion, a market sales comparison approach is ALWAYS essential and should be the primary method\u2014and the one given most weight\u2014in valuing a property.\u00a0 The only true value in a\u00a0 market economy is the amount that others are willing to pay for it, and thus the attempt to estimate market value by looking at recent sales\u2014though still at best a process of estimation\u2014is the only method we have that goes to the heart of the matter.\u00a0 Beyond that, it would be nice to have a cost approach and an income approach (where relevant) but these are, in my opinion, at best a good way to cross-check the market value derived by the comparison approach.<\/p>\n

(8)\u00a0\u00a0\u00a0 Another thing you need to take a close look at is the aging of the comps.\u00a0 If all the comps were sold quite recently, then you are good in this department.\u00a0 But if one or more of the comps are more than 6 months old, this may be a problem.\u00a0 The next step would be to look at the comp matrix to see how much the appraiser adjusts the target value to factor comp aging.\u00a0 If one or more of the comps are listings \u2026 well then, these aren\u2019t really comps at all.\u00a0 I have seen comp workups using nothing but listings.\u00a0 This is totally unacceptable. Anyone can list a property for any price they want.\u00a0 It would perhaps be reasonable to have 1-2 listings along with at least as many \u201ctrue\u201d comps, but even this is getting into squishy territory.\u00a0 So here again, you would have to look at how the appraiser adjusted the subject value based on the \u201clisting\u201d comps.<\/p>\n

(9)\u00a0\u00a0\u00a0 You should spend the majority of your effort fussing over the comp matrix.\u00a0 This is the matrix which compares various characteristics of the subject property with various characteristics of the comps and makes specific adjustments for each of the comps to arrive at adjusted values for the comps (effectively attempting to monetarily \u201cconvert\u201d each of the comps into the subject property).\u00a0 If you have: (a) many adjustments, (b) large adjustments (relative to the price of the property), and\/or many seemingly subjective adjustments, then you may want to seriously question the integrity of the appraisal.\u00a0 You will want to walk through each and every adjustment, and here again, you must look for transparency.\u00a0 Does the appraiser explain the logic behind his adjustment decisions?\u00a0 If not, you have a transparency problem.\u00a0 At the end of the day, you must be comfortable with the adjustments and you must feel that they are objective, transparent, well thought out, and seemingly reasonable.\u00a0 If not, you must either (a) discard the appraisal, (b) contact the appraiser for further explanation, and\/or (c) revise one or\u00a0 more adjustments and revise the final subject value accordingly.<\/p>\n

(10) And finally you will want to be sure and take a look at other methods of valuation utilized (generally income and cost on commercial appraisals).\u00a0 And then you will want to determine how the appraiser has gone about reconciling the different values arrived at utilizing different methods.\u00a0 Sometimes a weighted value approach is used.\u00a0 If so, how much weight is being given to the comp value approach relative to other methods utilized.\u00a0 As you may have guessed by now, I generally like to see all or at least the vast majority of weight given to the comp analysis.\u00a0 If the appraisal doesn\u2019t explain the reconciliation, you have a transparency problem.\u00a0 If the comp value approach is not given enough weight, you may want to fall back on the value arrived at by the comp value approach as your own final value.<\/p>\n

And there you have it.\u00a0 There is a great deal more that can be said about reading an appraisal, and certainly this list of ten items is far from exhaustive, but it does give you a few things that you will not want to overlook.\u00a0 If anyone has their own favorite \u201ccrucial\u201d steps, I would love to hear about them.\u00a0 Please let me know and I will share them with the group.<\/p>\n

Last word:\u00a0 Don’t think that you don’t need to “read” an appraisal just because you are the loan broker or the borrower, thus relying on the work of the appraiser to be true and accurate given their credentials.\u00a0 I often ask brokers and borrowers if they have read the appraisals they have submitted, and what their opinion was. If they haven’t read the appraisal or clearly haven’t put the effort in to attempt to understand and make sense of it … well that wouldn’t necessarily kill the deal, but to my mind it highlights a potentially serious credibility issue.\u00a0 As a broker (and certainly as a professional investor borrower), you must read and understand the items that you are submitting.\u00a0 Anything less will generally become apparent to the lender and will ultimately undermine your ability to do your job effectively.<\/p>\n

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)<\/p>\n

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.\u00a0 Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Clay Sparkman This article was originally published, on The Private Money Broker Blog. on 8\/9\/10. Some two and a half hears later, I feel it is worthy to be modified slightly and published again. Whatever you do in the real estate business, I highly recommend that you give this post a good read. The most […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[2,9,26,28,29],"tags":[40,41,42,44,49,50,51,52,53,54,58,59,60],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/599"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=599"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/599\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=599"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=599"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=599"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}