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Prospective (Future) Valuations

by Administrator on Dec 12, 2018 Prospective / Retrospective 145 Views

Some value opinions can have an effective date of value that is in the future or as of a prospective date.  Appraisals of this type are not unusual for buildings under construction because it’s important for lenders to know how much value a building will have when it’s completed.

Commercial real property appraisers prefer not to step into the world of stock market financial analysts who regularly forecast stock market prices years into the future, even though most appraisers already employ discounted cash flow (DCF) models that have years of projected income streams in their Income Approaches (Yield Capitalization) portion of their appraisal reports.

Prospective valuations consider an exposure time that will be in the future, beyond the date of the report but before the date of value.  Even real property markets can change over time and a real property appraiser considering a property as of a future date has to consider what will happen with supply and demand in a real estate market over time.

How do you consider future supply and demand?  An investigation of the past is a good start.  If a market has been relatively stable for the last three to five years and there are no compelling external or internal factors affecting it, it’s not hard to forecast that market forces will likely remain stable over the short-term.

Let’s face it there were almost no appraisers who saw the 2008 crash coming that caused a near 32% overall drop in real property values.  Most real property appraisers, like most people involved in the stock market, were not paying attention to mortgage-back securities.  While many recognized the insanity of 100 percent loan-to-value, most appraisers generally do not second guess bank decision-making.  Some knew and were saying “this will end badly,” but most had no idea what was coming.

The lesson that I have taken from the 2008 financial crisis is that risks are out there even if you have no knowledge of them.  The farther into the future a prospective real property market value is forecast the more risk is associated with its value opinion. 

Future or prospective valuations have been addressed by the Uniform Standards of Professional Appraisal Practice (USPAP) in Advisory Opinion 34 and by International Appraisal Standards.  The USPAP Advisory Opinion notes that “Prospective value opinions, along with available factual data, are intended to reflect the current expectations and perceptions of market participants.  They should be judged on the support for the forecasts that existed when made, not on whether specific items in the forecast are realized at a later date.”  As long as you pay attention to current expectations and perceptions of market participants you should (as a real property appraiser) be on solid ethical grounds. 

Usually a property’s prospective highest and best use will not change, but there is no guarantee that it will not.  A use may not be legally permissible today but zoning could change after you deliver your appraisal report, or someone could announce a development that could render the current use to no longer be the highest and best use. 

An anticipated use, a construction completion date, a stabilized occupancy / vacancy date and stabilized rents can be forecasted but they cannot be known as a fact.  Thus, estimating or forecasting the value of a real property as of a future date almost always involves the creation of one or more hypothetical condition.  Appraisers don’t know if market conditions will change in a week, a month or a year, so prospective values are hypothetical.  No matter how reliable data on the past is the future cannot be known.  Explain that prominently in your appraisal report and no one can say that they were misled. 

For more appraisal information contact Glenn J. Rigdon MA, MRICS, IFAS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or http://www.horizonvillageappraisal.com, or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/General-Appraisal-Articles/Prospective-Retrospective/4721-Prospective-Future-Valuations.html

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