Using Appraisals for Speculative Acquisitions

How do you know that the property that you are considering or that you have in escrow is a good deal?  If you are an active investor in the real property market and you have considerable experience, especially if you are working with your own funds, maybe you don't want or need an appraiser’s opinion.  There are a group of investors who have decided that they will sink or swim based on their own decision-making.  You can’t fault these investors they don’t need an appraisal before they make a purchasing decision but they generally end up dealing with an appraisal when they try to get their deals funded.

Most other investors and buyers generally either need a mortgage, hard money or they need to convince a partner or partners that their decisions are sound when they purchase a property.  Some property investor / buyers just want an appraisal to see if an appraisal will validate their opinions.  Appraisals become difficult when someone has made poor decisions and they want an appraisal to prove that their decisions were correct.  Appraiser are wary of these assignments, the parties ordering them usually start the hiring conversation with a suggested value opinion, and that often happens before the property has even been viewed!  

Some clients order an appraisal report and then if they don't like the opinion they just throw the report in the trash.  There is no permanent record of an appraisal report associated with a property and they can afford the fee so they order the report and hope for the best.  It doesn't make a lot of sense to most appraisers but I think most of us hope that someone benefits from our work besides us.  We all realize that we are engaged to form an opinion of value and that ours is not the only opinion out there.

While appraisers try to limit their liability, by making sure that clients understand that appraisal report are completed specifically for them and for a specific purpose.  Some clients however still find a way to use reports as sales tools.  They ask, “what better way is there to sell a property than to provide evidence of value in the form of an appraisal?”  That is the rationale, but they don’t seem to understand that no matter who completed the report, regardless of their experience, education and credentials, it is simply one person's opinion.  A group of well-qualified appraisers often opine disparate values for the same property.

Appraisers will however consider things that are sometimes not obvious to many principals who are usually biased by their ownership interest or potential ownership interest.  Beyond location, comparable sales and cap rates there are many factors that can influence value like; construction quality, interior finish, visibility, net usable area, traffic count, land-to-building ratio and accessibility.    Importantly most non-appraisers don't even look at factors like financing, discounts, concessions, personal property or improvements made after a sale.

When it appears to a speculator that an asking price is too high an appraiser is often engaged to secure their objective market value opinion and again it may be used in a negotiation.  There are times when appraisers are engaged by both the potential buyer and the potential seller in a transaction, usually this happens when there is little or no trust among the parties and they feel that hiring their own appraiser is the only way to not have no bias on the part of the opposition.  This dual or triple appraisal of properties often happens in divorce litigation cases and sales that involve state trust properties.

I have suggested to speculators / investors that appraisals be completed both before their acquisitions and after their renovations, or if they are just flipping in before they acquire the property to confirm value.  That way it is less likely that they will buy the wrong property, pay too much for it, pay too much for its renovation, or spend too much to improve it if that is their intention.  An appraisal can be a valuable tool for those who need a reality check regarding the market.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, 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 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/

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