How much can an appraiser’s opinion be trusted? If an appraiser says a property is worth $10 million, what reason do you have to distrust him/her?
Commercial real estate appraisers have national and state standards which they must meet, much of which includes several hours of work experience. Because of these standards, most appraisers can provide a report with valuable insight and information; however, it should be noted that the appraiser is giving his/her opinion. This should be taken into context of why we require real estate appraisals.
When financing commercial real estate, naturally it makes sense to have a third party evaluate the property, so the borrower or lender is not being overly optimistic and over-leveraging the asset. While this puts the appraiser in the position of having nothing to gain, this also puts the appraiser in the position of having nothing to lose.
As mentioned, the appraiser’s value is an opinion. That does not mean the property will sell for the appraised value. In all likelihood, it will sell for a price above or below the appraised value. This occurs for a host of reasons related to the negotiation process. But, a property can sell for a value substantially higher or lower than the appraised value, because the buying and selling parties have an entirely different opinion of what the true value of the property is worth.
I think it is key to remember that a property’s true value is what someone is willing to buy it for. That value is not necessarily the appraised value. The appraisal report is informational and often a good reference point, but it does not command market values. And because it is truly an independent report, the appraiser suffers no recourse for having an opinion that does not materialize.
To best understand how the appraiser arrived at his/her opinion, it is important to read the report and understand the assumptions the appraiser is using. And, you may find you disagree with some of the appraiser’s assumptions. The assumptions drive the entire evaluation process, and I often disagree with some of the assumptions I find. That does not mean the appraiser is wrong, but it means we have a difference of opinion.
I feel the real task for financial institutions is to read the appraisal, understand the assumptions, and then decide whether the reviewer concurs with the assumptions. If the reviewer does not concur with the assumptions, then the reviewer should indicate how this could potentially change the value of the property.
To summarize, the appraiser’s evaluation is not a guarantee. The appraiser’s evaluation is an opinion based on a set of assumptions. The lending institution must review those assumptions and determine if they agree with them. Disagreement with the assumptions has serious impact on the assumed value of the property. And most importantly, the appraiser has nothing to gain in the transaction, but also nothing to lose by formulating an errant value or assumption.