April 18, 2017 at 12:00 am
When the parties of interest in a commercial real estate transaction finally reach agreement, and financing is a component of the deal, why does it then take so long to get a commercial real estate appraisal report completed? The simple answer is there are many obstacles to overcome in the valuation process for credible results. Let’s review some of the all-too-common pitfalls that can add unnecessary delays to completing an appraisal.
First, regulations require that a “financial institution” must be the Client of the Appraiser for all commercial real estate loans in excess of $250,000. Acting on behalf of their borrower, financial institutions usually solicit proposals from several appraisers to find the best fit in terms of delivery time of an acceptable appraisal report and at the most reasonable fee. In this process, the financial institution needs to clearly describe the characteristics of the property to the appraiser to obtain a reliable time/fee quote. Minor mistakes made in this initial step can easily cause delays, and if not corrected, can become a major obstacle in underwriting after work has been completed. So, step one is to accurately describe the property characteristics and scope of work to the appraiser.
Second, even though the borrower typically provides information to the lender in the application process, such information is not provided by the lender directly to the appraiser. The appraiser is usually instructed to request all necessary information directly from the contact person. Too often, when the appraiser reaches out to the contact person given, that person is not ready to provide the information in a timely fashion. In fact, sometimes the contact person given by the lender is the buyer (not the broker or the seller). This causes delays in that the buyer has no history with the property to answer questions effectively, and may only have some of the necessary information. Access to inspect the property itself may be delayed for a week or more while the contact person gets back from travels or notifies all tenants, and/or gathers all the requested information (e.g., leases, expense history, plans/specs, etc.). So, step two is to be ready to respond and provide the information and access.
Third, the due diligence process of finding and confirming current market data gets bogged down when participants do not return calls or Emails, and/or factual information on such transactions is kept confidential for whatever reason(s). Appraisers are bound by professional ethics and strict regulations that require confidentiality, so sharing such data when asked should not be the problem that it is at times. When financial institutions review our reports in the underwriting process, they will seek clarifications and revisions related to such data and analyses in support of the final appraisal report that they will lend on. So, step three is to share comp data.
Finally, if the appraisal assignment includes an “as complete” opinion, such as when renovations or new construction are involved, delays in obtaining final plans, specifications, project costs, time table for completion, etc. are often significant reasons why delays occur. If only preliminary plans/specs/costs are available, and these are subject to change, a series of delays/updates can occur which invariably puts the appraiser’s schedule in conflict with promised delivery dates on other projects that make it difficult to stay on track.
In closing, appraisers today don’t have the luxury of working on only one project at a time. We must commit to ever shorter delivery times to land assignments in this faster paced business environment. Estimates have to be made as to how long it will take to complete an assignment. Other promised project delivery dates can overlap into the mix if the current assignment stalls for any reason(s). Appraisers are paid a flat fee, not on a contingency fee basis, and are thus already motivated to complete more appraisals in order to earn more money. Appraisers, users of appraisal services, and market participants would benefit with a higher volume of better quality appraisal reports being delivered in a timely fashion. To that end, these are some of the common pitfalls that can delay the completion of a commercial real estate appraisal, and may be avoided.
Mark L. Plourde, MAI is the Managing Partner of Maine Valuation Company and a MEREDA member since 1997. Maine Valuation Company provides unbiased professional opinions of value on commercial real estate along with appraisal review services throughout Maine. www.mainevaluation.com
Categories: Maine Real Estate Insider