30 Lessons Learned in Commercial Real Estate Appraisal
Argianas and Associates has learned 30 lessons in the past 30 years
In the past 30 years, we’ve learned a few things about commercial real estate appraisal. Some of these learning moments have been to our chagrin, others have been from tried-and-true wisdom of appraisal giants of years past. The ability to learn is a skill but being open to learning is a choice. Our willingness to learn has helped our firm grow in the last 30 years. Here’s a list of the biggest lessons we’ve learned since we opened our doors:
- 1. Know where to start: Databases and public depositories of information are a great starting point, but they are a starting point, a good commercial real estate advisor knows information needs to be cross-referenced with market participants and confirmed before it can be relied upon.
- 2. Think critically: Let your appraiser be the property detective. We often hear from underwriting when a ‘better sale’ is identified, but oftentimes there’s a reason we may not have used it. Did the sale include seller financing, a liquor license, concessions, intangibles, or furniture? The market always seeks equilibrium and there is often a reason behind data that is or is not used.
- 3. Be wary: If a deal or proposition is too good to be true, it probably is, flush out the details.
- 4. One size does not fit all: Appraisal services are not one size fits all. From litigation support, evaluations, zoning consultations, an appraisal may not be what you need. When this is the case, having a trusted appraiser in your corner is key to making sure you get exactly what you need.
- 5. Focus on highest and best use: If you mess up the highest and best use analysis, the rest of the report becomes a great paperweight; when valuing a property, you must value the land as vacant and only then can you value the improvement. Mess up on what the HBU for vacant land is (retail, office, industrial), and your report has missed the mark.
- 6. Larger isn’t always more complex: Just because a property is larger does not necessarily mean it is more complex. Some of the most complex properties can be mixed-use properties with a mom-and-pop store occupying one of the units. In contrast, a large 300,000 SF logistics/warehouse may be no more than an empty shell.
- 7. Read the lease: Different words mean different things to everyone, the lease will explain the details (a gross lease, NNN, reimbursements, what TIs were initially included); the smallest oversight can quickly compound if not caught.
- 8. Begin with the basics: Before running down the hall to begin your assignment once you are engaged, drill down to the basics; the scope. Who’s your client, intended user, intended purpose, type, and definition of value, relevant characteristics of the property, and assignment conditions. A lot of heartache is prevented from an initial reading of the engagement letter.
- 9. Keep limiting conditions legitimate: Just because you decide to throw a limiting condition in your report doesn’t mean it will be acceptable. Clients hire an appraiser because they trust in our ability to help them make informed decisions, don’t muddy the waters by putting language in your report to suggest otherwise.
- 10. Appraisals are a team sport: Whether it is working with the underwriting team, property contact, owner, or our internal team, an appraisal isn’t done in a vacuum. If a problem arises, reach out, your clients will appreciate you for it.
11. No one knows a property like the owner: When you go to visit a property, take 5-10 minutes to go into the conference room and have a conversation. The more you can learn from the property contact, the better armed you’ll be when you’re writing your report.
- 12. Take your time: It’s very simple but often we find ourselves rushing to complete things. Do not rush, do not take shortcuts, nothing is a substitute for doing things the right way. Be efficient, but don’t sacrifice quality for an inferior product.
- 13. Best practices are, well, best: Best practices are timeless, adhere to them and you’re halfway there (substantively and procedurally).
- 14. Don’t try to be all things: Know who you are and the level of service you provide. You can’t be all things to all people and you shouldn’t try, either.
- 15. Get organized: A good appraiser is organized from the inception of an assignment until the delivery of the final report.
- 16. Success comes with integrity (or Integrity breeds success): Don’t focus on making money, focus on doing good work. Money will follow and people respect that you wake up each day and do your best. It’s a business model we have dedicated ourselves to for the last 30 years.
- 17. Under-promise and over-deliver: Don’t promise something that you might not be able to deliver on and risk letting down your client. Alternatively, when you go beyond the expectations, you leave people feeling appreciative.
- 18. Read the red flags: When basic things like the wrong address, addressed to an incorrect individual, or length of time between the time the subject was inspected and the date of appraisal in the letter of transmittal are present, take notice. These issues may be indicative of additional concerns.
- 19. Can you explain it?: If you can’t explain a topic in simple to understand language, you don’t really understand it. This should really be a test for yourself, and it’s to the client’s benefit. We often receive follow up questions and you must be able to advocate for the supportable work within the report.
- 20. Know your deal: Whoever is going to use the report, know your collateral because it may not all be the real estate (alternatively, that the appraisal matches the bank’s collateral) and underwrite what is rather than what ought to be.
21. Research saves the day: Research for zoning, environmental/land-use restriction, and other legal constraints – there’s nothing worse than having to reach out to the client to explain that the property they already have a loan on was not identified to be in a wetland or flood zone.
- 22. Building plans change: Just because you’re handed a building plan does not mean that the building has been built to those exact specifications, make every attempt to corroborate information.
- 23. The sum is more than the parts: An appraisal is much more than the reconciled value conclusion; value doesn’t repay loans – repayment is dependent upon security of property’s ability to produce revenue sufficiency to operate the property and service the debt.
- 24. Real estate is subordinate to the business: Although we value the real estate (land, structures, and improvements), you must not ignore the success (or lack thereof) of a business. A successful business with a demonstrated history of demand should not be ignored.
- 25. Know your levels (of market analysis): Use the correct market analysis for the type of property. Are things relatively stable? Projections and trend analysis should be suitable. If there is danger ahead, you better be sure you’re using fundamental analysis to account for the unstable trending expected for forecasting.
26. Dig into differing valuations: If there is a different value estimate of a report for the same subject at a concurrent point with the same property rights valued, don’t be afraid to find out why. You’re not looking to discredit someone else’s work, but understanding why large differences in value exist (improbable assumptions, source of repayment of the proposed credit, incomplete information shared) can help all parties involved.
- 27. Disclose: You cannot assume that the reader of your report will understand everything as intended when they review your work. Were the leases month to month, at or near market? In the sales history was it non-arm’s length? Take the time to disclose these nuances in the report both in the letter of transmittal, extraordinary assumptions, and body of the report as well.
- 28. Qualify: Equally important, you must qualify what you’ve included in the report. Although appraisers are hired as property experts, that does not give appraisers carte blanche to do and or say whatever they want. Explain why you’ve included the information you have in a simple and accessible way.
- 29. Embrace technology: Technology is a wonderful tool that complements a practice, embrace it and learn what it can do better than you can. Spend your extra time getting better at your craft.
- 30. Stay curious: Picasso is often quoted as saying, “It took me four years to paint like Raphael, but a lifetime to paint like a child.” In appraisal, properties really are unique, having the comfort to ask questions, and ask them again, can take years. Do not be afraid to ask questions.
- If you’re looking for an expert you can trust to approach your commercial appraisal with honesty, integrity and attention to detail, do not hesitate to give us a call at (630) 390-0113 or complete this form. Be sure to join our mailing list to receive our e-newsletter.