By Angelica Gardner
Asher Evan Investments

A Commercial Appraisal is only as good as its logic. Therefore, it is important to READ the entire appraisal. I will say that again, READ the entire appraisal. You must read it in order understand the logic and methodology used by the appraiser which leads to the concluded value. You should never accept an appraisal’s conclusion without making some reasonable determination as to the quality of the logic used.

Over the last 17 years, I have read well over 1,000 commercial appraisals. I typically order Narrative Summary Appraisals which range from 80 to 300 pages. I have read excellent appraisals, terrible appraisals, and appraisals which I believed were excellent, but later discovered had underlying factors I was not aware of until years later. An appraisal is just one person’s value on a specific day. You could hire three appraisers, have each of them complete a report as of the same day, and you would get three different values. That is why you must understand how the appraiser calculated the value, why they calculated it in that manner, and if it was a logical conclusion.

Here are the ten steps I take when reading a commercial appraisal:

  1. Quick Review – This is where you are reviewing the licensing and qualifications to make sure a qualified appraiser was engaged. You should also be looking to see if the appraiser completed the property inspection and authored the report. I have often received reports where the MAI appraiser signed off on the report, but a different appraiser completed the inspection. You should then look at the effective date of the appraisal. Is it recent? If it is a few months old, have there been any changes to the area which may have affected the value? If the appraisal is more than 6 months old, you may not want to use it. Ninety-eight percent of the time I require a new appraisal ordered by my company so that we may vet the appraiser. However, there are times I have accepted an appraisal ordered outside of my company. If that is the case, I also look at to whom the appraisal is addressed. If it is the borrower, I will not accept it. If it is the broker, I may accept, but I would have to know the full situation. If it is for another lender, I am more willing to accept it, if it turns out to be a good report.
  2. Familiarity with the Property – When you first get an appraisal start the review by familiarizing yourself with the property. What is being appraised? Is it a building or is there land involved? Is the property located in a desirable area? Is it rural? Once you have a basic understanding of this, next look at the improvement descriptions where you can learn more about the property (i.e., What is the size, acreage, building condition? What is the zoning?) It is a good idea to pull up an aerial view of the property and look around. Does the aerial view match the descriptions of the property and area? Then switch to ground view and look at the subject property and neighboring properties. This is a good way to make sure everything “makes sense.”
  3. Study Photos – Once you are familiar with the property, it’s a good time to go directly to the pictures included in the appraisal. It is important to have color pictures. Better yet, having an electronic copy of the appraisal is great to zoom in on the pictures. Here, you are verifying the pictures represent what is described within the report. For example, if the report is stating the subject property is leased, but has pictures of vacant units, this is a red flag that should trigger some questions. Next, review the pictures of the comparable properties to make sure that the comparisons used are similar to the subject property. Are they the same class of building? Are they in the same/similar condition as the subject? If you note obvious differences, it will be important to carefully study the comparison matrix within the report, paying attention to adjustments used.
  4. Check for “Subject To” Items or Conditions – While reading the report, pay close attention to any “subject to” items. Typically, this is within the first few pages of the appraisal. However, it may not be in the beginning of the report, but instead at the end. If the value is subject to conditions, you need to make sure those conditions can be met. For example, if the value is subject to certain additions or improvements, then you should make sure that there is a plan for those additions as well as funds for those additions?
  5. Check for Extraordinary Assumptions – Like “subject to” items, extraordinary assumptions are especially important. I once reviewed an appraisal on land in San Diego. The appraisal had an extraordinary assumption that the zoning on the land would change from a wildlife protected area to residential. The appraiser valued the land as if a developer would be able to build forty-five residential properties. But the land was currently a wildlife protected area and had been since the 1980’s. The appraiser reasoned the only thing needed was a vote by the city residents to change the zoning, despite the repeated unfavorable attempts to do this over the last 20 years. But this time it was going to happen. Yeah, right!
  6. Methods Utilized for Valuing Subject Property – It is my opinion that the sale comparison approach is the most important method and should be the one given the most weight in valuing the subject property. The market value approach of a property only considers what others might be willing to pay for the property. Looking at comparison sales of comparable properties, is the best estimate of a property’s value. It is also good to have a cost approach and an income approach included in the report. This allows for the opportunity to compare all three values and develop a full understanding and potential of the property.
  7. Ages of Comparisons, Sales, and Listings – Be sure to pay attention to the ages of the comparisons provided within the report. If all the comparisons were sold recently, then I would feel good about them. If there was a comparison included that was over, say, nine months, then go to the comparison matrix and make a quick note if there was an adjustment for age. When looking at the ages of comparisons, pay close attention to the type of comparison provided. Are all the comparisons sales? Are there any listings? If there are multiple listings and only a few sales, then there could be a problem with the report that would trigger questions for the appraiser and would be time to study appraisal and determine the adjustments made. Just because someone lists a property for a specific price, does not make it fact that the property value is the list price. I have had appraisals in which all comparisons were listings and many of the listings were over a year old. Unfortunately, this is something I tend to run into more often on Special-use properties, or rural properties.
  8. Comparison Matrix – I spend the most time studying the Comparison Matrix. Here, you can see the subject property details compared to the comparison property details. Paying close attention to the adjustments made by the appraiser, study each adjustment and see if they make sense. Look at the size of the adjustment, the number of adjustments and look to see if the appraisal includes written details of the adjustments made. There should be a logical reason for each adjustment to make sense. If not, there is a problem.
  9. Reconciliation of Approaches – Now it is time to look at the final value provided for each of the methods included in the appraisal. You should consider the value given for the Sale Comparison approach, then the value for the Cost approach and finally the Income approach. I look for the appraisers’ details on how they weighted the values. What I want to see is that most weight goes to the sale comparison approach. I want to see the appraiser’s methodology of his reconciliation to be sure that I agree with the final value, and I can fully explain the reasoning behind the value.
  10. Clarification and Finalization – At this point you have now read and studied the entire appraisal. Typically, you will have multiple questions for the appraiser. I call the appraiser with any questions or clarifications. There have been times I did not feel good about the appraiser’s explanations, or the methodology used in the appraisal. If that is the case, I will simply disregard the appraisal. Most of the time I get the answers that I needed to be comfortable. The appraiser usually appreciates the feedback and questions, and I know that I can feel good about relying on the appraisal and the value provided.

Most of us who are reading appraisals for underwriting purposes have a procedure to follow when analyzing an appraisal report. Over the years, I have adjusted some of my practices based on prior experiences or changes in the industry. While there are many ways to read and interpret appraisals, these steps I am sharing with you today are what I have found to be the most helpful. Note: While this article discusses the steps I use to read and analyze an appraisal, it is particularly important that the selection of the appraiser was correct. I believe using MAI appraisers is best. However, there are times when I cannot find one and must use another appraiser without the MAI designation. Always make sure the appraiser has a valid license, has experience in the property type and has had no prior relationship with the borrower. Warren Buffett went further and said cyberattacks are the number one problem with mankind. Not that I necessarily agree with him on that, but I think it plays well to highlight the importance of the subject at hand!