Top 20 Commercial Appraisal Review Issues

This list touches on only the most common appraiser errors noted after review of thousands of commercial appraisal reports by the principals of the firm and its highly experienced review associates.

  1. Missing or unsigned engagement letter. The engagement letter defines the client, intended use
    and intended user of the appraisal report along with the requested scope of work. The engagement letter should be the starting point of the review process to determine the client requirements for the appraisal. Without the engagement letter, the Reviewer cannot determine if the client requests have been met.
  2. Intended Use and Intended User do not match the engagement letter.
  3. Improper estimates of future dates for prospective valuations.
  4. Improper use (or lack of use) of Extraordinary Assumptions and Hypothetical Conditions
  5. Pending or recent sales of the subject property were not analyzed and only mentioned as part of the prior 3-yr. history of the property. If possible, prior sales price should be provided as part of the analysis and determination if the sale was reflective of a market transaction.
  6. A separate value was not derived and reported for excess land.
  7. Misclassification of the building type in the cost approach estimates (i.e., Marshall & Swift) and improper adjustments/refinements applied to the base cost.
  8. Lack of adequate discussion regarding the various forms of depreciation, especially economic and functional obsolescence.
  9. Incorrect estimates and inconsistent use of effective age and total economic life.
  10. Recording information missing from sale comparables.
  11. Confirming source information missing from sale and lease comparables.
  12. Missing information on comparable write-ups and inadequate discussion/analysis of rental concessions, rental escalations, renewal options, caps on certain expense recoveries and tenant improvement allowances. Overuse of listings rather than actual, recently executed lease comparables.
  13. Text in the appraisal report does not match the adjustment grids, or adjustments were miscalculated or applied in the wrong direction. Inadequate supporting discussion was provided to allow the reader to understand the rationale for the adjustment process.
  14. No discussion of historical operating history and whether the information was available to prepare the appraisal.
  15. Operating expense estimates in the proforma operating statement not adequately supported by expense surveys, expense comps or actual operating history. For tax analysis, lack of consideration for the likelihood of a reassessment of the subject property assuming a sale at or near the estimated market value.
  16. Missing deduction for flood insurance if the subject improvements were in a flood zone.
  17. Not taking into account the landlord’s responsibility for certain operating expenses during periods of vacancy (i.e. appraiser should show the NNN recoveries before taking the vacancy and collection loss deduction).
  18. No indication if all lease agreements were provided and actually read/analyzed by the appraiser.
  19. Overreliance on national 3 rd party survey data in the selection of capitalization rates and discount rates when the subject was not of the same quality or asset class as properties included in the data.
  20. A discounted cash flow (DFC) analysis was not included when the assignment and property type indicates one should have been performed.

mm Written by: Sandra & Bill Willard H. Langhenry, MAI and Sandra Poe, MAI, AI-GRS own and manage National Appraisal Review & Compliance Group based in Dallas, Texas. In addition to providing commercial appraisal report review services to financial institutions, National Appraisal Review & Compliance Group has the expertise to handle the appraisal bid and engagement process, oversee appraisal compliance and appraisal regulatory issues and assist in the bank audit/loan review process. Additional services include appraisal review audits and forensic appraisal analyses, as well as development and coordination of approved appraiser panels for lending institutions.

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