We receive many calls from mortgage brokers and borrowers for value verifications. In most cases, these requests are related to a refinance, a purchase money loan, or a construction loan. In each case, it is usually stated that the borrower would like to “feel” the value of the property before paying for a “full appraisal.” In addition, there is usually the carrot dangling from an appraisal assignment (either implied, inferred, or stated) at the end of the value check suit.

While we understand the desire to have a comfort level that the appraisal will “get there” at a desired value, value checks are just plain bad for all parties involved.

The role of an appraiser is primarily that of an independent third party. But the concept of value verification works against such independence and can do much more harm than good. The following three examples should make clear how value controls can undermine the appraisal process and lead to uninformed decisions in commercial real estate transactions:

Figure 1:
We recently worked on a property appraisal that included a family market, a fourplex, and three small commercial buildings. The site underlying all properties was approximately one acre. We inspect the subject and begin our assessment analysis. After completing an income approach and a sales comparison approach for each property, it became clear that the value as improved would not support the requested loan amount. In the unlikely event that we had provided a Value Check (and negative and negative income analysis), the analysis would have been over long before this point.

But as part of the judging process, the USPAP requires us to look at the highest and best use of the topic as vacant and as improved. This requirement forces the appraiser to delve into the subject’s alternative uses, including all legally and physically possible uses. We are then required to determine what use is feasible, and finally, of those feasible uses, we must determine which will bring the greatest return to the land.

In the case of the subject property, after further excavation, it was determined that the highest and best use of the subject matter was for redevelopment of the underlying site. Simply put, the value of the land was higher than the improved value. More importantly for the discussion at hand, if we had ended the analysis at the level of a value check, there is no way the deal would have been consummated and everyone involved would have been hurt by our mistakes. The lender and his agents would have lost revenue because no loan would have been made, the buyer would have missed out on a very good purchase, or possibly the seller would have been forced to lower the price and we, the appraisers, would not have had to complete the appraisal. appraisal allowance.

Figure 2:
Joe Appraiser receives a phone call from Moe Mortgage, who is none other than a mortgage broker. Moe asks Joe to pay for a property his client is buying for $2.2 million, and since Moe is one of Joe’s best clients, Joe agrees. Moe has told Joe that the subject is a commercial building and gives him the address. Joe, concerned that he doesn’t want to cheat his best client, goes further and searches public property records and checks the deck map. From those records, he finds that the building in question is a one-story commercial building containing 5,000 square feet and located on a 10,000-square-foot parcel.

So, Joe does a quick search for drafts. Since he knows the subject is in escrow for approximately $440/sqft. He runs the search using a sales price/sqft range of $400 to $480 per square foot. for commercial buildings ranging in size from 4,000 to 8,000 square feet. The search results in six comparables that are all relatively recent with a price range of $441 to $469 per square foot. Joe is very happy that he can keep his client happy and bring homework that he needs so much. So he calls Moe and tells him the good news. The subject’s value is approximately $440 to 470 per square foot, or $2.2 to $2.35 million.

Based on the positive results of the value check, Moe hires Joe to complete the appraisal. A week later, Joe goes to inspect the subject. Arriving at the theme, he discovers that the theme improvements consist of a 1,000 square foot piece of land. commercial building with 4,000 square feet. low cost steel storage building at rear.

Joe then inspects the components he had removed, discovering that they are all typical commercial buildings ranging in size from 4,500 to 6,700 square feet. None have steel storage buildings in their configurations.

Does the above example sound ridiculous? If you believe it, we agree!

The only problem is that this is a true example that I witnessed personally. Also, once Joe discovered there was a problem, he completed the assessment. Also, there was no mention of a steel storage building in his appraisal report. The subject was simply stated to be a 5,000 square foot commercial building.

The issues in this illustration are many and concerning, but most are due to Joe reporting an appraisal based on a default value. Whether he desperately needed the appraisal job, he was just trying to keep his client happy or just being greedy, I don’t know. I know that once he reported the value of the value check, he somehow messed up and the result was an appraisal that matched the value.

Figure 3:
Poor Joe gets a call from Moe for a value check. The theme is a proposed single-tenant casual dining restaurant building of the type typically used by IHOP, Denny’s, CoCo’s, and Baker’s Square. The landlord/developer has owned the land for a while and believes that he can make money by building the restaurant and finding a tenant when construction is nearing completion.

Joe’s preliminary search shows two nearly identical buildings on opposite corners of the same intersection as the subject.

Comp 1 leases to any of the four national restaurant chains mentioned above for 15 years with two 10-year options. There are 6 years remaining on the initial lease term. Rents are market based and include annual increases to reflect CPI increases. The property sold in the last three months for $255/sqft. with a Global Capitalization Rate (OAR, or Cap Rate) of 8.75%.

Comp 2: Comparable data indicates that the property sold one year ago for $250/sf. and was vacant at the time of the sale.

Joe is excited about build 1. He’s found a build his hat can be hung on. Also, Comp 2 provides excellent support to Comp 1, so he excitedly calls Moe and tells him the good news in the hope that he can complete the assessment.

However, the information about Comp 2 that could not have been reported in the comparable data sheet was that after purchasing the property, the new owner tried to rent it out for six months before finally settling on the current occupant, a familiar start. . upstairs restaurant. In addition, the terms of the lease were very favorable to the lessee with an initial term of one year, two one-year options, and a fixed rent for all three years. Additionally, the rental rate was well below the levels needed to support the construction of a new building.

Upon first examination, these two comparables indicate profoundly different views of the market. Comp 2 clearly indicates a lack of feasibility for the issue, while Comp 1 indicates that the tenant’s credit is strong enough to justify an investment in the property at a cap rate of 8.75%.

But what if further research, analysis, and verification showed that similar buildings with the same tenant as Comp 1 were trading at cap rates below 7.0%? This would suggest that the buyer saw much higher levels of risk associated with the comparable. Quite possibly, the buyer was concerned that the tenant would close this location and have to redevelop the site for an alternate use.

Although the above example is made up, parts of the story are very real. We often see what appear to be discrepancies in the market that, upon closer examination, end up supporting each other. This illustration clearly shows why USPAP requires the appraiser to verify each comparable. An incomplete value check would never have revealed the full picture of the market surrounding the proposed theme.

Conclusion:

Value checks may seem useful and reasonable to many on the lending side. After all, they save their clients money in appraisal fees. But in reality, value checks rarely make any sense. By doing a value check, appraisers have a very real chance of being locked into a predetermined value without having done any research or analysis. With independence shattered, then we may be pressured, either externally or internally, to make the assessment conform to the reported numbers. Therefore, in my opinion, the USPAP rules are clearly based on a firm understanding of the real world of appraisal and are established to protect the appraiser’s role as an independent third party.

Additionally, while a value check may reflect an exact value of a property, there is also a high chance that crucial data in determining the market value of the property in question will be lost. The rules were written to protect against such instances.

So, I think it’s self-evident that a value check is not only potentially harmful to the appraiser, but equally harmful to all parties involved in a transaction, whether it’s for a construction loan, a refinance, or a purchase, since the data can mislead decision makers to make ill-informed decisions.

It is my hope that after reviewing this article, the reader will leave with a firm awareness of the pitfalls of value controls. While I do not for a moment believe that I will persuade all interested parties, it is my hope that each will take away with them the realization that when you ask for a value check, that when an appraiser compels and performs a value check, the results can be much more harmful than they are helpful.