Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he begs all of us to find the middle ground between relying too much on, and being afraid of, technology. …Jonathan Miller
As this is my “maiden” contribution to this blogsite I feel that I risk perhaps being accused of piling on (which I believe is an old penalty in football that is now probably considered “unnecessary roughness” as I add my commentary to the state of the art of valuation in all of its technical permuations and perpetrations alongside my fellow bloggers, Commercial Grade, Sounding Bored and Solid Masonry. But from the vantage point of some 30 years of being on the fee side of appraisals and a wide array of consulting work including 13 years of ordering and reviewing appraisals for a major bank on the lending side I believe I have seen it all only to be disabused of the misconception that there is nothing to learn even if it means learning that technology is only as good as the person using it.
This past week I encountered two seemingly disconnected events involving real estate valuation that, in retrospect, caused some mental churning and on second thought turned out to be definitely connected.
The first involved an article in the Wall Street Journal entitled, CALCULATING YOUR HOME’S VALUE ONLINE that described four online sites where homeowners can obtain an estimate of their home’s value. Three of these sites were free with one offering a connection to a real estate agent who develops a broad price for the home and emails it with several comparables that can be further refined but requires an-site visit; the second free site provuides the hone owner with a price plus data on 30 comparables along with a rating on how fast homes were selling in the given area; and the third free site provided a price quote along with aerial maps and 10 comparables, price history and area trends. It also allowed the homeowner to adjust to adjust the variables to provide for a more refined number (note my use of the word “number” and not value). The fourth site charged a fee of of $9.95, $14.95 or $29.95 depending on how much data was desired and provided a range of prices or numbers along with comparables but also had a link to a real estate agent for more definitve pricing. The article goes on to mention the more traditional appraisal involving retaining an appraiser who charges who charges $600 for an “in-house” visitation but also has varied fees for “drive-by” and “desktop” estimates all of which produced a variation ranging from $305,000-$400,000. If this stirs memories of the age old sayings, “you get what you pay for”, there is no free lunch” and “what do you expect for nothing” you have company.
The second seemingly disconnected event involved a consulting assignment I had with a small New England bank chain that refers appraisal reports for a second opinion or asks me to point out any weaknesses in the report that may impact upon their underwriting. The property in question involved a chain hotel with a separate free-standing pad site containing a chain restaurant under a long term ground lease with renewal options. The restaurant owned the improvemnts which were realtively new so the liklihood of renewals were reasonably certain as the location and business conditions were favorable. In analyzing the appraisal the appraiser applied a standard hotel DCF valuation model to arrive at the hote’ls annual cash flow and then added the ground rent (below the line) from the restaurant to arrive at a final value conclusion. I pointed out to the credit officer that there was obviously some additonal value left on the table as the appraiser was adding in the ground rent and discounting same at the same internal rate of return as the hotel. The pad site ground rent, being a safer risk than the hotel, should have been discounted at a lower rate and then added to the hotel value to produce a final value which would have been higher. As I was not called on to discuss this with the appraiser (thankfully)it befell to the credit officer to discuss this with the appraiser. The answer: the appraiser’s valuation model for hotels did not allow him to value the ground lease in this manner.
The moral of this story is that we cannot allow ourselves to become Luddites but we can become captives of technology if we do not know its limitations or how to employ the technological tools we have to work with.