It takes years of experience to build the professional skills and expertise to become a proficient Commercial Real Estate Appraiser. I will be discussing a basic foundation that isn’t generally taught early on in an appraisers career. Appraisers in our community are incredibly talented and have discussed in detail the nuances of USPAP and intricate definitions and protocols of how to systematically handle complexities within the appraisal process. This article Appraisal vision is designed to discuss the “real life” practicalities of appraisal and the application of foundational principles to help you master your opinion of market value
After decades of appraising and resulting grey hairs I have gained a better understanding and a broader prospective into an investors psyche. Investors are generally motivated amongst other things by the hopes of riches (hope and sometimes greed), becoming independently wealthy (retirement) and capital preservation against inflation. Historically speaking Investment Real Estate has been an excellent vehicle to achieve these objectives. Investment Class Real Estate competes with alternative investments (Stocks, Bonds, Business Investment, Cash). Investors have choices of risk tolerance and competing rates of return. Its always important to consider and understand various asset classes that compete against Real Property. Why is Real Estate competitive?
Lending rates and availability of funds are a key driver of Real Estate values and leverage is a significant contributor to potential value (imagine taking away the opportunity to leverage a property). In addition Real Estate allows for a write-off and the potential to raise rents over time. Thus, taking on some attributes of Inflation Index and Municipal Bonds. Lastly, as an alternative to blue chip stocks is the three sweetest words in Real Estate Location, location, location. The closest thing you can get to the risk profile of a AAA Government Bond is well located Real Estate. However, as we spoke about leverage 3 to 4 capitalization rates are not very attractive when lending rates increase. Competition get too strong for this investment class and vision can loose focus as exuberance distorts truths about risk and future returns. Periods of increasing values, Low interest rates and the hope of rising rents can blur the vision of many of the most savvy investors. However, it’s hard to argue the 20/20 vision of being located within a supply constrained marketplace that is highly desired like many major city centers across the Nation and Coastal areas in California. Investor’s also focus their sight on macro global trends, and consider the concept of a growing global population, technological advancements and the capacity of Governments to print money without backing. The result is a Vision for Investment Real Estate. As indicated, this vision at times gets distorted and desperation leads the pack into lower tiered properties and locations. Blindly chasing return and not truly realizing the inherent risks. An Appraiser determines Market Value by mirroring the vision of investors as of a specific moment in time. An investor determines what to buy, where to buy and how much to pay. Accurate opinions of values are best achieved by the understanding market forces and an Investors Vision.