Transforming Appraisers: From Value Reporters to
Strategic Consultants
Contributions by Michael J. Rohm, MAI, CCIM, R/W-AC
July 18, 2024
The Commoditization of Appraisers
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Over the past 40 years, U.S. government regulations aimed at standardizing practices and ensuring transparency in real estate financial markets have significantly impacted the commercial real estate (CRE) appraisal profession, particularly in bank financing. [1] These regulations have led to the perception that CRE appraisers provide standardized, low-value commodities, mere hurdles in the transaction process. This shift towards prioritizing the cheapest and fastest appraisers undermines the profession's critical role in providing reliable and credible property valuations essential for market stability.
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If appraisers are viewed as one-dimensional practitioners solely focused on reporting a value, their perceived value in broader CRE decision-making is limited. In contrast, brokers, lenders, and developers are perceived with a lens of versatility, discussing feasibility, construction costs, market trends, and investment strategies. While regulations have commoditized the role of appraisers for financing transactions, there is a growing need for valuation consultants who can solve complex problems and provide deeper insights, especially in private markets and alternative products.
What Makes Appraisers Valuable? Big Data + Holistic Thinking
Automated valuation models (AVMs) and artificial intelligence (AI) are revolutionizing the CRE appraisal profession by streamlining processes and enhancing accuracy. [2] AI manages low-level tasks, improving daily workflow, while AVMs analyze big data to increase productivity and expedite decision making. Although these technologies will not replace all appraisal functions, they will cultivate a leaner, more skilled group who compound quantitative analysis with experience, intuition, and nuanced judgment.
The value of an appraiser lies in their ability to think holistically, synthesizing all aspects of CRE valuation into a succinct and understandable manner for the client. This includes highest and best use, economic insights, regulatory knowledge, physical conditions, location analysis, environmental considerations, financial performance, competitive positioning, tenant preferences, investor appeal, risk management, and community impact. Appraisers offer a deep understanding of local market conditions, unique property traits, and complex business strategies—areas where AVMs fall short. Instead of relying solely on regression models, appraisers should embrace AVMs as a baseline, supplemented by insights on active listings, pending sales, and market sentiment.
For those open to compounding big data with holistic thinking, there is abundance of opportunity to transform the appraisal profession from mere reporters of values into consultants who solve complex problems.
Holistic Thinking – Example #1
Scenario: An appraiser is tasked with valuing an apartment complex that an investor plans to raise rents on in the short term. The listing agent claims the property is selling at a 6.50% cap rate, while the buyer broker suggests a 7.75% cap rate. After analyzing the pending sale and historical and pro forma income and expenses, it is evident that different NOI derivation techniques yield varying capitalization rates.
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In this scenario, both the buyer broker and the listing agent offer valid perspectives, underscoring the importance of holistic thinking since no two capitalization rates are identical. It is the responsibility of the appraiser to 1) accurately describe these perspectives and 2) ensure that comparable capitalization rates are derived using consistent NOI derivation techniques. This approach blends quantitative analysis with qualitative insights. It allows appraisers to become storytellers, providing more reliable and contextually relevant valuations.
Holistic Thinking – Example #2
Scenario: An appraiser is tasked with valuing a piece of vacant multifamily land that is being sold without entitlements. However, all comparable sales in the area involve land that is either entitled or contingent upon receiving entitlements.
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In this scenario, a holistic approach supports the value of unentitled land by providing and adjusting entitled land comps for entitlement costs and entrepreneurial incentive. This method provides a non-traditional, yet practical and credible approach that reflects the complexities of the entitlement process. Supported by conversations and relationships with active market participants, this approach offers insights that AVMs might lack.
Appraiser Tips: How to Evolve
1. Embrace Big Data to Paint a Full Picture
Instead of relying solely on a few comparable data points, leverage extensive datasets to provide a comprehensive market analysis. Include backup data such as comparable sales considered but not used and describe pending sales and market sentiment around active listings. This approach captures the current market dynamics and adds depth to your appraisals.
2. Cross Education
The CRE profession benefits from diverse knowledge. Enhance your appraisal skills with additional qualifications like the CCIM designation or the ASA's going concern designation. This cross education enables you to understand various market facets and provides a well-rounded perspective.
3. Value your Network – Foster Reciprocal Relationships
Building strong relationships with market participants (lenders, developers, brokers, investors, property managers, accountants, and financial planners) is crucial. Conduct thorough interviews and reciprocate the data shared with you by offering to speak on local CRE panels or hosting lunch-and-learns. Demonstrate your expertise and how it benefits your network, fostering reciprocal relationships and becoming a true resource. If you don't know how to add value quickly, you won't build these crucial connections.
4. Experience ≠ Quality
Years in the profession do not determine the quality of the appraiser. Ironically, years in the profession may lead to arrogance in the absence of curiosity and reflection. Curiosity compounded with experience equals competency. Therefore, an open mind is a quality all clients should seek when engaging an appraiser. Journal your experiences, noting blind spots, challenges, lessons learned, and how you improved. This honest reflection leads to more comprehensive future valuations.
5. Embrace Alternative Valuation Products
Diversify your services to include buy vs. lease decisions, sale-leaseback transactions, and IRR hurdle assessments for equity investors. Offer consulting on land development, capital expenditure yield analysis, acquisition due diligence, disposition strategies, estate planning, sustainability initiatives, value in use and investment value reporting, value vs. list price analysis, and feasibility studies. Expanding your service offerings makes you a versatile problem-solver.
Conclusion
By combining advanced technologies with a holistic approach, integrating cross-disciplinary knowledge and leveraging a wide network, the appraisal profession can evolve from a mere reporter of value into a valuable consultant, providing deeper insights and solutions in an increasingly complex market. Contact Commonwealth Commercial Appraisal Group to discover how our holistic approach can transform your CRE valuations.
[1] Regulatory requirements and lender guidelines often emphasize compliance and uniformity in appraisal reports. This focus can shift attention away from the appraiser’s analytical skills and market insights, reducing their role to that of a box-checker.
[2] On June 24, 2024, the Consumer Financial Protection Bureau approved a new rule to address the current and future applications of complex algorithms and artificial intelligence used to estimate the value of a home.
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More info can be found at: www.consumerfinance.gov/about-us/blog/cfpb-approves-rule-to-ensure-accuracy-and-accountability-in-the-use-of-ai-and-algorithms-in-home-appraisals/
Brendan Wewer, MAI is a commercial real estate appraiser working throughout Pennsylvania, Delaware, New Jersey, and Maryland. He is Director of Valuation & Advisory for Commonwealth Commercial Appraisal Group.
Contact him at bwewer@commonwealthappraiser.com
Michael J. Rohm, MAI, CCIM, R/W-AC, is a fee appraiser and real estate agent working throughout Pennsylvania.
He is president and owner of Commonwealth Commercial Appraisal Group and is director of valuation advisory and senior associate with Landmark Commercial Realty.
Contact him at mrohm@commonwealthappraiser.com.
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