A recent My View article questioned the use of forced liquidation values in relation to current “market” sales, based on the premise that, given the current state of the market, nobody who can afford to hold onto an asset would sell it right now.
The article pointed a finger at appraisers, implying that they are a significant part of the problem affecting bankers and borrowers in the current economic environment, the worst since the Great Depression. Specifically, the article claimed that appraisers are trying to force banks and developers to change their historic relationships with short-term fixes on long-term assets and that this will only continue to depress real estate values, decimate developers, and erode bank capital.
Fee appraisers who do their jobs properly and ethically remain completely independent of the interests of the parties involved in a transaction. Their goal is to report the most probable price at which a property would change hands between a willing buyer and seller.
Given this “most probable price” assumption, an appraiser is supposed to clearly indicate when true comparable sales are unavailable to form a conclusion through a market/sales comparison approach to value. An appraiser certainly should complete all due diligence on any possible comparable sales to be used in a final appraisal, and this includes understanding the form of sale of the property. For example, did the sale result from an auction or liquidation process or from an arm’s length negotiation?
There is no question that, especially over the past 12 months, the residential, commercial, and industrial markets have been flooded with properties offered at prices significantly below historical highs. However, one must look back at how a combination of economic factors brought us to this point, what the short-term predictions are, and why an appraiser cannot ignore these facts when a lender is relying on these conclusions.
Consumer-Driven Economy
Over the past three decades, the U.S. economy has slowly transitioned from one defined by industrial companies to the current service-dominated economy. Service-oriented businesses thrive when consumers consistently spend significant portions of their disposable incomes. As a result, corporate revenues generated through consumer spending remain healthy enough to support the commercial real estate market because retail and office vacancies remain at manageable levels.
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