How Appraisers Interpret Market for Valuations
YOUNGSTOWN, Ohio – Like the real estate market, one of the first things that stands out to Jason Vantell when he appraises real estate is “location, location, location.
“That’s probably the generic answer,” he says with a laugh.
Vantell is president of Vantell Associates in Boardman.
That makes sense. The two fields are closely related. But where a real estate agent looks to assign a value buyer and seller can agree on, Vantell is looking for something else: the market value of the site.
There are three methods to perform an appraisal: comparison, income and cost. They are the industry standards and have been for decades, says Greg Vantell, a principal at Vantell.
The comparison approach is just as it sounds. An appraiser visits properties similar to that being appraised in terms of age, size, use and quality, among other factors. In office complexes and industrial parks, finding similar properties isn’t always difficult. In the complex where Vantell & Associates has its office, South Bridge Executive Park, all buildings were built within a few years of each other, are approximately the same size and layout and of the same quality, meaning the value of the buildings is pretty close.
But for some appraisals, the process for comparisons involves some guesswork and calculations to adjust for properties that aren’t an exact match.
“It’s not a perfect world and buildings aren’t identical,” Greg Vantell says. “One of the problems we face with the comparison approach is finding buildings that are truly similar. Sometimes we need to find something that’s as similar as [possible].”
Pictured: Greg Vantell, principal at Vantell Associates.
In the cost method, appraisers calculate the value of the land and replacement cost of the building on the property, then subtract depreciation to arrive at their final number.
“If it’s a brand-new building like the Dunkin’ Donuts across the street, the replacement cost is pretty close to the market value because it fulfills a need,” Jason Vantell says. “If you go into an industrial area, the cost for new is so far from what it’d sell for because depreciation has such an impact.”
The third and final method, the income approach, is the most frequently used in commercial real estate, says Chris Tricomi, an appraiser at Tricomi & Associates. Here, calculating the value of a property is based on the income it may generate based on its size, expenses such as taxes, insurance and maintenance, and an allowance for vacancy, Tricomi explains, with a capitalization rate applied.
“One of the most important factors, if not the most, in commercial real estate is the income-generating potential,” he says. “We look at the existing lease if it’s in place – the rent, the term, whether it’s a gross lease or net lease – and, if it’s not being rented, the potential probable rent.”
Arriving at the valuation of a property isn’t as simple as pulling numbers out of a hat or spending a couple of hours looking at a building, notes Richard English of Richard G. English & Associates in Sharon, Pa. In his procedure, he looks at the site itself, the age of structures and their condition. If it’s a manufacturing site, he considers the layout and workflow of the space.
“Once you’ve looked at a property, which honestly has the least time spent during the appraisal, the appraiser goes through gathering data relating to functions of the building: what’s permitted and what’s not, the land size, the building size,” he says.
There is no standard time it takes to put together an appraisal. It’s rare, he continues, for an appraiser to work on only one property Monday through Friday and turn in his report at the end of the week. Instead, he works on multiple reports at a time, some requiring that more data be found or, in the comparison data, more time to find similar properties.
Once the value of a site is determined, that figure is used for just about anything pertaining to real estate and money: taxes, insurance, listing prices and loans.
“When a bank lends money, say if the property is selling or an owner wants to refinance, they need an appraisal,” Tricomi says. “In a conventional loan, they usually loan 80% of market value, so they need know what number they can lend.”
With that responsibility, appraisers are strictly governed by federal and state regulations, which cover everything from how appraisals are conducted and the continuing education an appraiser needs to maintain his certificate. The state standard is the certified general appraiser, which requires 300 hours of classroom work, 1,500 hours of tutelage under an already-approved appraiser and an exam.
Professional certifications, such as the MAI – formerly known as “Member of the Appraisal Institute” – require 3,000 hours of experience, four additional courses, a 16-hour exam and a demonstration report that takes three months to complete, Tricomi says, who has both the MAI and SRA, senior residential appraiser, certifications.
Federal regulations also require that appraisers be independent of the properties they evaluate – they can’t have any financial interest, direct or indirect – and of the financial institutions they work with, or be granted appropriate independence during their process if they are part of the staff.
In transactions where appraisers are needed, that independence is paramount to the professionals, all agree.
“The appraiser is the only unbiased person involved in the transaction. Everybody else has skin in the game, whether it’s the realtor, the owner, the loan officer,” English says. “The appraiser doesn’t care about all that. His path is to arrive at an opinion of value based on the market. The appraiser doesn’t make the market; he interprets the market.”
Pictured at top: Vantell Associates President Jason Vantell.
Copyright 2023 The Business Journal, Youngstown, Ohio.