Appraisals and Values -- Getting it Right

As usual this week, most news relating to finance or the economy was not good or just depressing. However, some hope was provided to us via an interview in the California Report from Jerry Nickelsburg, an economist with UCLA’s Anderson School. Jerry mentioned that some real estate markets might have started to bottom out. These markets are the ones that have already seen a drop of up to 75% in value or more. Other markets are now seeing the effect of the lack of capital and might bottom out in 2009.

It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.

Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.

Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values