We receive many calls from mortgage brokers and borrowers
for value checks. In most cases, these requests are related to a refinance, a
purchase money loan or a construction loan. In each case, it is typically stated
that the borrower would like a “feel” for the property’s value before paying for
a “full-blown appraisal.” Further, there is usually the dangling carrot of an
appraisal assignment (either implied, inferred, or stated) at the end of the
value check stick.
While we understand the desire to have a comfort level that the appraisal
will “come-in” at a desired value, value checks are simply bad for all parties
The role of an appraiser is primarily that of an independent third party. But
the concept of a value check fly’s in the face of such independence and can
cause far more harm than good. The laws of most states recognize this and have
made value checks ostensibly illegal through the adoption of the Uniform
Standards of Professional Practice, USPAP.
Such illegality comes into play in several ways: first, USPAP makes it
illegal to provide a value for a subject property without having inspected the
property; second, USPAP states clearly that an appraisal may not be based upon a
predetermined value; third, USPAP makes clear that if an appraiser states,
writes, or otherwise transmits a value to another party, the appraiser is, in
fact, reporting findings of an appraisal; which takes us to the fourth problem with
value checks, reporting a value without having done the analysis is clear ethics
But what if the appraiser is just pulling comps for the client. The Appraisal
Foundation, the authors of USPAP, has even clarified their position on this
issue. If an appraiser has any input into the comps that are generated, he/she
is guiding the results, which means that the appraiser is guiding the resulting
value, or range of value, that his/her client will conclude to. Thus it is a
violation of USPAP.
It is hopefully clear by now that value checks are indeed illegal, but
ignoring the illegality for the moment, why are they simply a bad idea, even if
intentions are good? The following three illustrations should clearly indicate
how value checks can undermine the appraisal process and lead to uninformed
decisions in commercial real estate transactions:
We recently worked on the appraisal of a property which included a mom-n-pop
market, a fourplex, and three small commercial buildings. The site underlying
all the properties was approximately one acre. We inspected the subject and
began our appraisal analysis. After completing both an income approach and a
sales comparison approach for each property, it was clear that the value,
as-improved, would not support the requested loan amount. In the unlikely event
that we would have provided a Value Check (and a down-n-dirty income analysis)
the analysis would have ended well before this point.
But as part of the appraisal process we are required by USPAP to analyze the
subject’s highest and best use as-vacant and as-improved. This requirement
forces the appraiser to look deeper into alternate uses for the subject,
including all legal and physically possible uses. We are then required to
determine which use is feasible and finally, of those feasible uses, we must
determine which will bring the highest return to the land.
In the case of the subject property, after digging deeper, it was determined
that the highest and best use of the subject was for redevelopment of the
underlying site. Simply put, the value of the land was higher than the value
as-improved. More importantly to the discussion at hand, had we ended the
analysis at the level of a Value Check, there is no way that the deal would have
been consummated and everybody involved would have been harmed by our mistakes.
The lender and its agents would have lost revenues because no loan would have
been done, the buyer would have lost out on a very good purchase, or possibly,
the seller would have been forced to reduce the price, and we the appraisers
would not have had the appraisal assignment to complete.
Joe Appraiser receives a phone call from Moe Mortgage, who is a none other
than a mortgage broker. Moe asks Joe to comp out a property that his client is
purchasing for $2.2 million, and since Moe is one of Joe’s best clients, Joe
obliges. Moe has told Joe that the subject is a retail building and gives him
the address. Joe, concerned that he does not want to mislead his best client
goes even further and looks up public records for the property and reviews the
plat map. From those records, he finds that the subject building is a one-story
retail building containing 5,000 square feet and is located on a 10,000 square
So, Joe does a quick comp search. Since he knows that the subject is in
escrow for approximately $440/sq.ft. he runs the search using a sale price/sq.f.t.
range of $400 to $480 per sq.ft. for retail buildings ranging in size from 4,000
to 8,000 s.ft. The search results in six comparables that are all relatively
recent with a price range of $441 to $469 per sq.ft. Joe is very happy because
he can keep his client happy and bring in the much needed assignment. So he
calls Moe and tells him the good news. The subject’s value is approximately $440
to 470 per square foot, or $2.2 to $2.35 million.
Based on the positive results of the value check, Moe then engages Joe to
complete the appraisal. One week later Joe goes to inspect the subject. Upon
arriving at the subject he finds that the subject improvements consist of a
1,000 sq.ft. retail building with a 4,000 sq.ft. low-cost steel storage building
at the rear.
Joe then inspects the comps that he had pulled and finds that they are all
typical retail buildings ranging in size from 4,500 to 6,700 square feet. None
have steel storage buildings in their configurations.
Does the above example sound ridiculous? If you think so, we agree!
The only problem is that this is a true example that I personally witnessed.
What’s more, once Joe figured out that there was a problem he completed the
appraisal. Moreover, there was no mention of a steel storage building in his
appraisal report. The subject was simply stated to be a 5,000 square foot retail
The problems in this illustration are many and troubling, but most result
from Joe having reported an appraisal based upon a predetermined value. Whether
he desperately needed the appraisal work, was just trying to keep his client
happy, or was simply being greedy, I do not know. I do know that once he
reported the value from the Value Check he was somehow marred to it and the
result was an appraisal fit the value.
Poor Joe gets a call another call from Moe for a Value Check. The subject is
a proposed single-tenant casual dining restaurant building of the type typically
utilized by IHOP, Denny’s, CoCo’s and Baker’s Square. The landlord/developer has
owned the land for a while and figures he can make a mint by constructing the
restaurant and getting a tenant when construction is nearly completed.
Joe’s initial comp search comes up with two nearly equal buildings on
opposite corners of the same intersection as the subject.
Comp 1 is leased to any of the four national restaurant chains named above
for 15 years with two 10-year options. There are 6 years remaining on the
initial lease term. Rents are market based and include annual increases to
reflect CPI increases. The property sold in the last three months for $255/sq.ft.
with an Overall Capitalization Rate (OAR, or Cap Rate) of 8.75%.
Comp 2 - The comparable data indicates that the property sold one year ago
for $250/sq.ft. and was vacant at the time of sale.
Joe is excited by Comp 1. He has found a comp he can hang his hat on.
Moreover, Comp 2 lends excellent support to Comp 1, so he excitedly calls Moe
and tells him the good news hoping he can complete the appraisal!
However, information about Comp 2 that could not have been reported in the
comparable’s data sheet was that after purchasing the property the new owner,
tried to lease it for six months before finally settling on the current
occupant, a mom-n-pop start-up restaurant. Further, the terms of the lease were
highly favorable to the tenant with an initial one-year term, two one-year
options and flat rent for all three years. Moreover, the rental rate was well
below levels required to support construction of a new building.
Upon first examination, these two comparables indicate profoundly differing
views of the market. Comp 2 clearly indicates a lack of feasibility for the
subject, while Comp 1 indicates that the credit of the tenant is strong enough
to warrant an investment in the property at an 8.75% cap rate.
But what if further searches, analysis and verification showed that similar
buildings with the same tenant as Comp 1 were transacting at sub 7.0% cap rates?
This would suggest that the buyer saw much higher levels of risk associated with
the comparable. Quite possibly the buyer was concerned that the tenant would
close this location and he would have to redevelop the site with an alternate
While the above example is made-up, parts of the story are very real-world.
We often see what appear to be discrepancies in the market that after closer
examination end up supporting each other. This illustration shows clearly why
USPAP requires that each comparable be verified by the appraiser. A down-n-dirty
Value Check would never have revealed the whole picture of the market
surrounding the proposed subject.
Value Checks may seem useful and reasonable to many on the
lending side. After all they save their client money on appraisal fees. But in
reality, Value Checks rarely make any sense at all. By doing a Value Check we
appraisers stand a very real chance of locking ourselves into a predetermined
value without having done any research or analysis. With independence shattered,
we can then be pressured, either externally or internally, to make the appraisal
fit the reported numbers. Thus, in my opinion USPAP’s rules are clearly grounded
in a firm understanding of the real world of appraisal and are set-up to protect
the appraiser’s role as an independent third party.
Moreover, while a Value Check may reflect an accurate value for a property,
there is also a very strong chance that it will miss crucial data in the
determination of market value for the subject property. The rules were written
to protect against such instances.
Thus, I believe that it is apparent that a Value Check is not only
potentially harmful to the appraiser, but it is equally harmful to all parties
involved in a transaction be it for a construction loan, a refinance, or a
purchase, as the data can mislead decision makers into making ill-informed
It is my hope that after reviewing this article, the reader walks away with a
firm awareness of the pitfalls of Value Checks. While I do not for a moment
believe I will persuade all interested parties, it is my desire that each will
take with them an awareness that when one asks for a Value Check, they are
asking not only for an appraiser to break the law, but that when an appraiser
obliges and conducts a Value Check, the results can be far more harmful than
they are useful.
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