How do Market Trends Influence Appraised Values?

Most appraisal assignments direct the appraiser to form an opinion of the market value of a specific property. If you are familiar with appraisal definitions you know that most market value definitions indicate that market value is the “most probable price” that a market participant will pay for a property. So in most instances appraisers have to consider value as an anticipation of future benefits.

When information becomes available to an appraiser that vacancy rates for the subject property type are increasing, that mortgage financing is difficult or impossible to secure and that foreclosures are expected to increase, it becomes clear that the future benefits of the real properties located in the market are being negatively impacted.

Appraisers generally analyze comparable sales data which, when market activity slows, can be dated. They also analyze market supplied and property specific income data that may not reflect the fact that vacancies are increasing dramatically in the market or that current tenants are already behind on their rent.  It's important that appraisers not accept data supplied at face value. 

Most appraisal reports completed in 2009 will include information on market conditions or market activity. Appraisers discuss supply, how many properties are on the market (inventory), and demand how many properties have been sold in the subject’s market area and how long they took to sell (absorption).  Information on the number of properties under construction is also an important piece of data. 

When few transactions are being completed, following the asking prices of similar properties is important. It makes no sense to conclude a market value of $ 250 per square foot of gross building area (GBA) for an office building when five similar buildings have been on the market for the last six months at $ 220 per square foot.

The cost approach in many situations provides a solid indication of value based on a calculation of replacement cost less depreciation. In the upside down world of foreclosures, however, market value can fall well below replacement cost.

When market sales do become available appraisers go back to their paired sales analyses. The adjustment of comparable sales and the forecasting of likely future benefits are greatly enhanced when based on empirical evidence.

Market trends, as evidenced by falling asking prices, falling sales prices, falling lease rates, increasing concessions, increasing vacancy rates, increasing defaults, increasing foreclosure rates and price decreases as evidenced by paired sales all influence the appraisal process and the formation of appraiser opinions.

For more appraisal information contact Glenn Rigdon, MA, MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website.

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