_Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John begs appraisers to get out from behind our computers and talk to commercial brokers about whats going on in the front lines._
_Disclosure: John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, on Thursdays, one of the smartest guys I know._ …Jonathan Miller
It’s all about the market. You’ve heard it beforewe appraisers don’t make the market. Rather, we are impartial observers of the marketplace. What I think about a particular property doesn’t really matter. My appraisal must reflect “the market’s” thinking. A very fine, but critical distinction.
It is important, therefore, that appraisers stay in tune with the market. If I find a comparable sale that was recorded yesterday, it most likely closed two months ago and went into contract two months before that. This sales price, therefore, likely reflects the market mentality at least four months ago. In most cases we don’t find a sale that was recorded yesterday, but rather one, two or three or more months ago and, in reality, it reflects a market a half year ago or more.
With rapidly changing market conditions the appraiser runs a real risk of missing the boat if he/she does not make broker interviews part of the normal appraisal process. Not always easy, and some don’t want to be bothered, but my experience with the brokerage community is that if you act as a professional and approach a broker as a professional, they’ll spend some time with you.
The broker interview tells you what’s happening in the market now, not six months ago. What kind of demand are you seeing? What kind of offers are being made? It puts a sales transaction in a meaningful context and gives additional insight into what’s really happening that you don’t get from staring at a computer screen.
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I’ll forever be grateful to my first commercial appraisal boss for teaching me not to become an internet appraiser. His expectation was that we were to talk to at least 6 brokers/agents that specalize in the area and type of property we were appraising.
Now that I’ve moved on from him I can objectively reflect on this method of appraising, and as I reflect, I see three major things: 1) Appraisers are a necessary evil in the eyes of most brokers. 2) Brokers/Agents are highly optimistic. 3) You’ll rarely find any comparable properties that support the values/CAP rates/expenses/whatever that the brokers you are calling are giving you.
Wait… here’s a fourth: 4) My ex-boss wanted us to call at least 6 brokers because that’s how many you have to call to get one knowledgable one.
The selection of the brokers in which one talks to is the most important step in this process. An appraiser must select brokers who are “actually active” in the marketplace closing deals on a regular basis, not just listing “machines”.
Broker interviews will yield information that can include; 1) indications of a stable, falling or rising market, 2) changes in marketing time, and 3) insight into changes in supply & demand into the not too distant future. I have found that most knowledgeable brokers are open to surveys and questions. I highly recommend the use of email as a survey tool after initial contact and rapport is establish with a broker. This allows the broker to respond in writing and on his or her schedule (i.e. no voice-mail tag). You can always hit them with a telephone call if no reply is received after a few days.
With the advent of on-line databases like Loopnet that allow the tracking of “in-contract” deals. Appraisers can obtain confirmation from brokers on deals “currently in the pipeline” for closing. I find that most brokers want to chat about their deals and opinions on the market. Of course, you need to take all of the information with an air of caution.