John Sheehan,  A.S.A.

Tracy Theran
 

781.769.7890

Fax 781.769.1927

tracytheran@verizon.net

15 Cottage Street
Norwood, MA 02062

FREQUENTLY ASKED QUESTIONS

Your Commercial Real Estate Appraisal Questions Answered

What's in your commercial appraisals?

You specify what you want within the bounds of the Uniform Standards of Professional Appraisal Practice (USPAP^[1]):

> an overview of the area, community and neighborhood
> a detailed site and building description
> a zoning analysis
> a highest and best use analysis
> an in-depth discussion of 1-3 different approaches to value
> a final reconciliation and opinion of value

Do you appraise properties in areas you don't hold a license?

We limit our assignments to New England and primarily Massachusetts.

What is the range of services you provide?

We can provide:

> Tax assessment review, advise and appraisals
> Advice in eminent domain and condemnation property transactions
> Dispute resolution - divorce, estate settlements, property partition suits, foreclosures and zoning issues
> Feasibility studies
> Market studies
> Capitalization rate and market ratio studies
> Market rent and trend studies
> Cost/benefit or investment analyses
> Land utilization studies
> Supply and demand analyses

When hiring an appraiser, what questions should I ask?

> Are you licensed or certified in the states you practice?
> How long have you been in practice?
> What level of experience do you have with this property type?

Like any job you are contracting out, it pays to compare the resumes of appraisers whom you are interested in having them prepare a bid.

What appraisal approaches will you use in appraising my property?

The most commonly accepted valuation approaches are the cost approach, the sales comparison approach and the income approach.

The cost approach combines the value of the land and depreciated site improvements with the depreciated value of the building. The sales comparison approach compares the property to others and adjusts for differences. The income approach takes market rents, subtracts a vacancy allowance and expenses, and takes the resulting net income and turns that into value using a factor.

We are not required to provide all three approaches and it is rare that all three are done. Appraisal theory has largely discredited the cost approach as reflective of market value and commercial appraisers seldom provide it. The sales comparison and income approaches are the primary valuation methods used for commercial properties. Even then, there are times when one of these approaches does not reflect the market and although it might be performed, it is given little or no weight in deciding on the final value conclusion.

We know our markets and can advise you which approach or approaches would apply. We won't recommend two approaches when only one reflects the market. Call us.

How do you determine what approaches to value you will use when you provide a bid?

Having performed many appraisals on a wide range of property types, our fees typically reflect the cost to perform two approaches to value, usually the sales comparison and income approaches. Even if we do not perform an approach, many times we still invest time in searching for data. This occurs most frequently in areas where too few comparable sales occur - we still look for them, but we do not create the market, we merely report it.

There are times when a third party, such as a lender, will require the cost approach to be performed. If that is the case, please tell us beforehand so that we can incorporate this into our estimate.

If I don't like the appraised value, what can I do about it?

That depends upon many things. The best place to start is to speak with the appraiser(s) who signed the report. It's possible that he/she may have overlooked one or more important factors which affect the value of your property; if you mention it in your conversation, you may find the appraiser willing to reconsider the value conclusion. Of course, if you are not their client (such as when your bank orders the appraisal), they are not required to speak about the appraisal and may be in violation of the licensing law or professional standards if they do so.

It's important to remember that the appraiser is an unbiased third party. Our job is to find out the good and the bad about a property and report it, not to favor a direction.

If you are still dissatisfied, you can get a second opinion by hiring another appraiser or insist that a review appraisal be performed on the original report. If there is a large discrepancy in value, you or a third party may be able to negotiate an intermediate position.

Appraisal Cost and Turnaround Time 

How much do your appraisals cost?

Every appraisal is different, so fees are quoted on a per job basis. Generally, prices depend on the number of properties and the complexity of the assignment, though appraisals used as evidence in court cases command a higher price.

Why do special purpose properties cost more?

Special purpose properties require us to research a wider trade radius, perhaps even outside Massachusetts. Fees are based on time estimates, so the more time we have to invest in finding comparable properties, the higher the fee. Also, the market analysis section of the report many times requires a greater amount of research time and it is not uncommon to have to purchase studies performed by industry experts to properly show the dynamics affecting the property type.

What is your typical turnaround time?

Commercial appraisal delivery times typically range from two to four weeks, depending upon the complexity of the property and your needs. It generally requires one to two weeks to do the research, verify the factual nature of the information, perform a market study of the area and write the report. Delivery times of less than three weeks are typically considered rush orders and may command a price premium.

How can I help shorten the turnaround time?

The number one way to help shorten the turnaround time is to provide us with the written information we need as soon as possible. Copies of leases, rent rolls, income and expense statements are the needed as soon as possible. Delay in providing one or more of the necessary items will almost always result in a delay in the appraisal process. When we inspect the property, try to have it available for the person who accompanies us through the building.

If you don't come up with the value I want, do I have to pay for the appraisal?

Appraisers must maintain a third party position to your transaction. No appraiser can accept an assignment where bias could be interpreted. USPAP has a phrase used verbatim by many appraisal firms on their letters of transmittals:

"Our assignment was not based on the reporting of a predetermined value, a direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result or the occurrence of a subsequent event directly related to the value opinion."

USPAP is very clear on this issue. Appraisers cannot be advocates for any client. Although it may seem unusual to some users to have to pay for a report that did not provide them a favorable outcome, appraisers governed by appraisal licensing laws must remain objective.

If there is any uncertainty in the value, clients should have the appraiser perform a restricted appraisal first and then upgrade the report to a summary or self-contained if the value is satisfactory. This is acceptable appraisal practice and one not often suggested by an appraiser.

Why are the fees for commercial appraisals so much higher than residential appraisals?

There are many reasons why there is such a great discrepancy. The most important difference is the amount of time it takes to prepare each type of report. Most skilled residential appraisers can do a residential report in a half-day whereas a skilled commercial appraiser needs at least a week.

Residential reports are on a common form with a standardized property type whereas commercial appraisals are mainly free-form documents with information that varies with the property type, market and client needs. Special use commercial properties take longer and can have a multi-state data search radius, thus making it more time intensive and costly to perform than more common property types such as office and apartments.

Using the Appraisal

Can I reuse your appraisal for another purpose?

Only if you receive our permission. Be aware that many financial institutions will not accept an appraisal performed for one of their competitors unless the first source provides a written release. Also, we are not required to testify in an assessment reduction case if the appraisal was done for something other than a tax appeal.

I want to use your appraisal for financing, but don't have a source. Can you prepare your appraisal for any lender?

You should make sure your lender will accept our report before ordering. Lenders can have different internal guidelines, so knowing what is required helps prevent the additional time it takes to modify a report or do additional report analyses, increasing the time it takes to get a final product to the lender.

I paid my lender for the appraisal, therefore I should own it.

The appraisal is legally owned by the client, unless the lender "releases its interest" in the document, typically in writing to us. If the lender ordered it, they own it. If you just want a copy of the appraisal, under the Equal Credit Opportunity Act you can be given a copy of it upon written request of the lender.

Getting the Value Conclusion Before Ordering the Appraisal

If I didn't order the appraisal, can I find out the appraised value?

Only if you ask the person who originated the order and they provide permission in writing. However, we can not provide you with this information because it would violate the ethical standards governing our appraisal practice.

It doesn't make sense to me to hire you if I don't know you'll come up with the value I need. Can you give me a guarantee?

It is a violation of state laws and the appraisal licensing laws of the Appraisal Institute to provide a value opinion without doing an appraisal. Although we cannot provide a guarantee, we can perform a restricted appraisal that will tell you what the property is worth. If the value opinion is acceptable, we can upgrade the report to a summary or self-contained format for a higher fee. We can quote both fees to you so you'll know the best and worst case costs. Surprisingly, the fees are not that different since all the valuation work is done regardless of what report format is prepared.

I'm Confused by the Type of Reports I Can Order

I see there are three types of reports I can order. What's the difference?

The final appraisal product delivered to you depends on the type of report specified by our agreement. Each written real property appraisal report must be prepared using one of the following three options:

1)    Self-Contained Report – A self-contained report is the most detailed, descriptive report format that can be requested.   It includes an in depth market area analysis and neighborhood description.  These may not be needed by a local lender who is familiar with their real estate market.  However, this information may be needed by someone not familiar with a particular area of the country.

2)    Summary Report – This is the most commonly requested report format.  It includes detail, but generally less information about the subject region of the country and state than a self-contained report.  This report is generally 30 to 60 pages long.

3)    Restricted Use Report – While the same amount of analysis is performed for this report format, the report produced is very brief – typically only 3 to 5 pages.  The report format is generally requested if all parties are familiar with a particular property or if an opinion of value is required for decision making purposes.  Many times, a summary report is requested as a follow up to a restricted use report.  An important caveat is that USPAP does not allow a restricted use report to be used by anyone other than the client or someone intimately familiar with the property, so if the appraisal will be viewed by third parties, a summary or self-contained report must be prepared. Appraisers cannot "recertify" this type of report to any other lender.

What type of report do I need?

The appraiser is in the best position to tell you what type of report you need. He/she is required by USPAP to determine the scope of the assignment, the function of the appraisal and use of the report. To do that, he/she will need to understand your needs, so the appraiser is in the best position to recommend one or more of the above choices and to counsel you.

Appraiser Independence

The appraised value of the property depends upon whether the appraisal is conducted for the buyer, seller or lender.

The appraiser has no vested interest in the outcome of the appraisal and should render services with independence objectivity and impartiality - no matter for whom the appraisal is conducted.

I paid for the appraisal. Why am I not entitled to get a copy?

The client is the person who engages the services of the appraiser, usually in the form of an engagement letter. Many times the lender is the one who issues and/or signs an engagement letter, making them the client. It does not matter who pays the bill. Only the client and those who he has specifically authorized are allowed to receive a copy of the report from the appraiser. If the person who pays the bill is not the client, verbal or written permission is required for the appraiser to release the appraisal to anyone else.

Appraisal Myths and Realities

Will the market value equal assessed value?

While most states support the concept that assessed value approximates estimated market value; in practice, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of improvements, or when properties in the vicinity have not been reassessed for an extended period.

Shouldn't market value approximate replacement cost?

Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. Rarely are they the same number.

My broker performed a market valuation. Why do I need an appraiser to perform one?

There are many reasons why valuations are required to be done by appraisers. First and foremost, the appraiser is an independent, third party. Many times, the appraiser is the only one in the transaction that does not have a vested interest in the outcome. This is the reason for the creation of the appraisal industry in the 1930's.

Another important difference between a broker's valuation and that performed by an appraiser is that a licensed appraiser is bound by USPAP, whereas a broker is not.

What is meant by scope of work?

According to USPAP, for each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must

1)    Identify the problem to be solved;

2)    Determine and perform the scope of work necessary to develop credible results; and

3)    Disclose the scope of work in the report.

 An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work.  This means that appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment. 

Prior to July 2006, scope of work was referred to via the concepts of a “complete” or a “limited” appraisal.  A “complete” appraisal meant that all applicable approaches to value would be considered and potentially completed, and a “limited” appraisal meant only one approach would be completed.  The appraiser and the client typically consulted with each other to determine which “type” of appraisal to complete.  Effective July 2006, these terms are no longer relevant.  Now, it is the appraiser’s responsibility to determine and perform the appropriate scope of work. Or, the burden is on the appraiser to consider and complete all approaches necessary to generate credible results.  However, client input is part of the appraisal process and communication with the client is required to establish most of the information necessary for problem identification and scope of work determination.