Archive for the 'Appraisals' Category

Appraisals Are Causing Damage

Appraisals Are Causing Damage

It is clear from feedback from a variety of appraisers that there is great debate within the appraisal community as to the veracity of many appraisals and the methodology. It is very clear to me that the methodology is completely wrong and that some appraisers just did whatever they were instructed to do. Just because this is the way appraisers always did it and it proved totally wrong, is every reason to change it.

In discussions with friends who run banks and sit on boards of trustees of major pension funds, as well as many of my capital markets colleagues, it is clear that almost nobody believes appraised values any more. They are either too frothy in good times or overly negative in bad times, but rarely correct. For banks they are dangerous. In good times they lead to bad lending decisions, and in current times they lead regulators to require banks to foreclose even when the loan is current on interest and the borrower is a responsible owner. Pension funds revalue assets by appraised value in some cases and that undervalues assets currently. CMBS resolutions of defaults require appraisals and they are frequently wrong and lead to bad outcomes. As proof we know that each side gets its appraiser and the results are usually very different. As a former lender, I know that it is easy to get some appraiser to gin up whatever was needed to justify a loan, even when the value was known to be too high. The whole system and methodology is badly in need of new rules and procedures.

Appraisers who responded to my blog admitted that they merely reflect the current thinking of investors- as though there was some universal edict among all investors. How do they explain that some investors got out of the market in 2007, while others got in. Which set of investors were the appraisers reflecting. Why do a 10 year cash flow and projected terminal values and discount rates if at the start you are trying to reflect the current investor thinking. That just proves the projections have to be architected to fit the answer which was pre determined to reflect current market prices. It is all nonsense. That is why MAI stands for made as directed. The appraisers have actually admitted in several responses to my blog and my column in Hotel News Now, that they do make their appraisal fit what the borrowers or lenders demand.

It is time that the Appraisal Institute convene a roundtable to include bankers, investors, pension trustees and underwriters to set new methodology so that appraisals do what they should, provide a true, independent valuation with all the potential risks brought to the fore of future events. We had thought after 1990 and the new rules then, that things might change, but they only got worse. It is time for true resetting of the definition of what is an appraisal and how is it to be accomplished to give real ranges of values. I am not trying to eliminate appraisals, just to make them much more accurate and usable so they are not misused as they have been and continue to be.


Appraisals Are Deeply Flawed

Appraisals Are Deeply Flawed

I recently wrote a column on HotelNewsNow stating that appraisal methodology was deeply flawed and that appraisals are essentially fairy tales based on a bunch of unsupported wild guesses by appraisers. They claim to be able to project cash flow, interest rates, discount rates, terminal value cap rates, and renovation requirements for 10 years and then they use some unsupportable discount rate to determine present value. It is all nothing more than wild guess compounded by more wild and unsupportable wild guesses. It short, appraisals to me, have no value, and were clearly proven to be nothing more than propaganda to support unrealistic loans in the 05-07 period.

In response to the column two appraisers commented that”appraisers are required by our standards and regulations to reflect the market. If the market is being optimistic we are required to reflect that. It is not the appraisers role to adjust projections or cap rates or values or opine if anticipated net income is not sustainable. We are merely reporters on the sidelines. If you want us to tell you what we really think then have us put our consulting hat on instead of asking us to do an appraisal.”  Another appraiser said “we are required to reflect the froth”.

That says it clearly. Even the appraisers say their appraisals are nothing more than make believe to reflect what the clients wants them to say. In fact one appraiser responded to my column by saying “who are we to question the view of the borrower or the lender”.  

Why do appraisers even bother with the make believe of 10 year cash flows, alleged terminal cap rates and all the rest. What they are admitting finally is they are merely making all that up in order to get the answer their client wanted in the first place. This is why when I created the first hotel CMBS programs in 1993 we refused in our underwriting to use any numbers or values the appraisers came with. We got appraisals just to fill the rating agency file folder.

Everyone would be much better to ask appraisers to provide real numbers and projections as the appraiser I quote above has suggested. Phony appraisals was one of the contributors to how we had the crash. They were used as excuses to make stupid loans. The rating agencies are the ones to drive this change. The servicers tell me they are relying much more on broker opinions of value than appraisals and they only get appraisals because they are required to by the PSA docs.

In 1993, our underwriting manual required the use of historic cash flows and then current cap rates to determine loan proceeds. Loan to value was only used to make sure we did not exceed a percent of the appraised value since we knew the appraised value was in excess of reality, we always wanted to below that test.

My intent here is to get the capital markets, the rating agencies, and the real estate industry to start to use appraisers properly, and to use their knowledge in a way that is helpful, and not to support excessive lending and stupidity.  If the truth hurts as to projections and value, then loan proceeds should reflect truth and not bull.  If we redo how loans are underwritten, and if we use the talents of the appraisers properly, we may just help save ourselves from the next crisis in the capital markets.  Excessive lending and over inflated values always lead to a crash-that is reality, so let’s not repeat this costly history.