Tag Archives: appraisal


August 9, 2018 – Over my 30+ year career, this question has come up every few years.  When performing the Income Approach for a vacant or owner-occupied building (same thing), should there be discounting for the time and cost to lease it up?

My short answer is – Yes.  However, I would say 99% of appraisers do not make such a deduction.  Why not?

A few notes before I summarize a great response from an appraiser who does make the deduction.

First, America’s definition of Market Value assumes a sale occurs.  Therefore, an owner-occupied property is vacant when it sells.  That occupant moves out so either a new owner occupant can move in or third-party tenants can move in.  I have long argued that EVERY house/condo in America sells vacant – regardless if the owner occupies it right up to closing or it is physically vacant beforehand.  Of course, rental properties are the exception.

Second, the Income Approach assumes an investor owns the property and will lease it up to stabilization to third-party tenants.  The Income Approach does not assume owner occupancy!

Therefore, a vacant or owner-occupied property has to be leased up to obtain stabilization that is assumed in the direct cap method of the Income Approach.  Lease-up is not free and instantaneous that often.  Below is the summarized response that was shared with me.

As always, I welcome your thoughts.  Unlike our cultural and political world, differing opinions are welcome and will not be called ‘tone deaf’ or racist or some kind of phobic and so on:)  If I get enough comments, I will do a follow up post.

(Oh, let me add that the Sales Comparison Approach will depend on what sales are used.  If the comps were 100% vacant and/or owner-occupied, then the SCA already reflects such discounting for lease-up.  If the comps were partially or 100% leased, then….hmmmmm….)

(Second oh….all of this is needed to determine one of the 3 highest & best use conclusion items – type of occupancy.  Sometimes it is Owner Occupancy and other times it is Third-Party Tenants via an Investor owning the property.)

OK, finally to the Anonymous Appraiser Reply:

  1.  For the purpose of our analysis, owner-occupied space is presumed vacant and subject to deductions to reach stabilized occupancy in the “As Is” Market Value.
  2. FIRREA requires appraisers to “Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units.”
  3. The present value of all costs necessary to achieve stabilized occupancy (including rent loss, leasing commissions, concessions, tenant improvements, rehabilitation costs, and/or profit loss) incurred during the lease-up period must be considered in developing the “As Is” Market Value conclusion.
  4. ((In this particular appraisal, )) The sales utilized in the Sales Comparison Approach were all vacant or owner-occupied; therefore, no lease-up adjustment was applied to the Sales Comparison Approach.

I agree with this logic.  Even for non-FIRREA appraisals.

What does the market do?  Well, that is answered in the Sales Comparison Approach as prices for vacant and/or owner-occupied properties reflect how an owner values the property or an investor values it knowing s/he has to find a tenant(s).


And remember, Spend Forward, Use Forward!

Agencies Finalize EGRPRA Review with Joint Report to Congress

March 22, 2017 – After about 2 years, FFIEC has finally published their report that includes dealing with appraisal issues.

The link is below.   Pages 28 to 40 deal with appraisal issues.  Albeit, appraisals are discussed a bit in a few other places.  As noted, these are NOT final and official changes.

In general, if the proposal does not change, this is a big win for appraisers.  The small increase in a single threshold will not have a major affect on appraisal volume.



April 23, 2016 – I write this in a purple-tinted world.  Prince music playing in the background….

This past week I ‘celebrated’ my 30th year as an appraiser.  Time flies and it certainly has been an interesting career.  It has taken this long to finally get to my ultimate goal – reviewing appraisals worldwide.  I recently started performing reviews in South America and hopefully Africa is next.  Talk about interesting appraisal reports!

I would imagine that some people would ask what I have observed over the decades.  A few things come to mind…

First, the trend for appraisal fees was down when I started in 1986 and has continued in that regard.  I recall in the late 1980’s we never bid less than $10,000 for a hotel appraisal.  By 1992, when I started working at a bank and ordering appraisals I was able to get hotel appraisals for under $5000.  The trend has been the same for other property types.  The exception being residential appraisal fees that have increased from around $150 to over $400 in general.  Funny how it is the residential industry that cries the most about fees!

Regarding appraisal quality that has also been in the same direction as fees.  I recall in 1992 and onward I would publicly say that 95% of appraisers were incompetent.  That held until 2008 when that increased to 99%+ of appraisers currently being incompetent.  The main cause was the crisis resulted in significant Highest & Best Use issues for problem properties and this generation of appraisers was not taught how to think (sort of like The Stupidest, er Millennial Generation).  As a result, the quality of work declined significantly from 2008 thru today.  I have yet to run into a fee appraiser who has become a review appraiser who doesn’t agree that the quality of work in the industry is pathetic.  And that is being generous.

I haven’t observed much else.  In the past few years, I have seen more good appraisers get out of the industry than ever before.  This past week it was good to hear from a friend that he has totally exited the industry and moved on to a new career.  And another long-time friend is actively transitioning over to brokerage.  I am seriously thinking about starting a business to assist appraisers in transitioning out of this industry and into something new that they will enjoy.  Life is too short to be miserable.

As for the talk about there being a shortage of appraisers – it is total BS!  This is simply propaganda by the ‘establishment’ (i.e. NAR and Banks) to get standards for becoming an appraiser lowered.  They know they can better control stupid and incompetent people than smart and competent people.  My measurement of a shortage of appraisers is when commercial appraisals take 60-90+ days to complete – like in the RTC days.  And when residential appraisals take 3-4 weeks.  Until that occurs, there is no shortage of appraisers.

An update on my market projections…..

GOLD – The metal is up 23% from its low and mining stocks are up 122%.  Gold hit the $1285 area I projected and declined to the low $1200’s as forecast, too.  It has been bouncing around and wasting time, as is often needed.  I think there is still a chance to see $1190-$1200 again.  But, I believe the $1380-$1500 range is still very likely.  I have not sold any of my gold or gold stocks.  This bull market is still young.  Silver has finally exploded to catch up with gold.

STOCKS – I’m looking for a 1500-2000 point decline in the DOW from here.  I did get out of my dividend stocks (T and DUK) as they were up 10% this year and that sector was the best performer in the first quarter.  I am hoping for 10% declines in each stock so I can get back in them.

OIL – I initially was expecting a 50% rally from around $35 to over $50 by June.  However, oil went down to around $26-$30 first before rallying to near $44 this past week.  The 50% rally has occurred.  I think the rally is limited now to $2-$8 more – so $50 can happen, but heck the projection is close enough to being complete.  My Exxon investment is up over 15%, but I am not cashing that in.  I am still an oil and gold bull for a long period of time.

SOYBEANS – New crazy prediction (similar to my oil one in January).  Beans got above 10 cents (per bushel) this past week for the first time in a year.  I see 12 cents and maybe 13 cents this Summer – not a great forecast as they could hit that next week if they wanted to.  But, still if it comes true it is better than those who expect the price to decline:)  The bigger prediction is for Beans to hit 20 cents for the first time in history next Summer.  For that to occur, we would likely have one of the worst droughts in Midwest history – like the Dust Bowl.  I doubt rain and flooding could do enough damage to send prices to all-time highs, but that is an alternative.  I admit I won’t be playing this forecast.  If it happens, I’ll probably quit forecasting and kick myself for missing out on the greatest bull market in Bean history.

Enough for now….

Prince, we all now know what it sounds like when doves cry….R.I.P.



January 7, 2016 – First off, Happy New Year to everyone.  I hope you had a safe and fun Holiday Season.

As we start 2016, the markets are showing signs of The Echo Depression(c) being fully underway.  Like the Summer of 2005, I was saying  last Summer that the new correction was beginning.  Exactly 10 years later, but that is just coincidence.

The other interesting timing is the 1929 Crash and 1937 Bottom occurring 8 years apart.  Some have noted this and predicted that 8 years from the 2008 Crash would place us in a major bottom area for 2016.  The odds are increasing every day that this will occur.

Social Mood, which is measured by the stock markets, peaked last June and July, for the most part.  This usually leads Social Action by about 3-6 months.  As such, we should see weak GDP growth in the USA in the 1st and 2nd Quarters of 2016.  Probably beyond that, too.

Hopefully, the peak in housing prices will occur soon and the much needed correction will get underway.  Of course, NAR and the public will deny that prices are back at ‘bubble’ levels.  A Bear Market and Echo Depression(c) start with the masses in denial.

Once again, we will look back and appraisers will say how could anyone know?  Yadda Yadda.  If you don’t realize that many markets are priced way above value again, then you aren’t doing a good market analysis.  There is no excuse for not considering a downturn is upon us – and for those who sued appraisers for inflated appraisals back in 2005-2008, you can get ready to do it again.

The Market Conditions Addendum was invented for the exact market conditions we are in.  Collect the right data.  Analyze it.  Recognize when the downturn has started to occur.  Be emphatic with your conclusions.  It is time to step up and do what the market has wanted us to do all of these years.  Don’t just follow prices up and down like we have for 80+ years!

On TV we should hear analysts saying that America’s economy is not dependent on China’s economy.  Americans are in less debt than before the 2008 Crisis – of course, Americans are still way more in debt than they can afford and more than ever occurred before 2008.  None of this matters and it is simply a way to keep the public invested so the smart money can continue to sell out at the top.

1937 was a severe bear market, but it is not mentioned in comparison to 1929-1932.  The Echo Depression(c) will be remembered the same way in comparison to the 2008 Crisis.  As I have tried to explain for the past few years, 95% of ‘tops’ simply occur and are followed by bear markets and recessions.  Rarely do ‘bubbles’ occur (2027-2032 is my prediction for the next huge bubble to occur).  My expectation has been the public would get fooled this time as they would be looking for a ‘bubble’ the size of 2008 to ‘know’ when to get out of their investments.  Even if such a bubble did occur again, the public would actually be buying more at the top.  As Mann’s Axiom says, the market is always wrong.

My friends have heard me say for the past 3+ years that I was waiting for Gold to go below $1100 and Silver below $14 and I would get back in those markets.  I am back to being all in like I was back when gold was $250-$300/ounce.  Commodity bottoms are tougher to call than commodity tops – just the opposite of financial markets.  So, I doubt I will have picked the exact bottoms.  But, I think we will look back in several years and say hey not a bad place to have bought at.

Oil is as negative as you will ever see.  I joke with the wife that I am going to take delivery on an oil futures contract and have a 100,000 gallon tank sitting in our back yard:)  I would rather be a buyer now than when it was $100 a barrel.  My way out there prediction is for oil to break above $50 per barrel by June or earlier.  I think I am the only one in the world who predicts such.  As always, we shall see.   And yes I have actual money placed on this happening.  Luck please look my way:)

Regarding oil, it was a year ago a few of us were saying that the bubble in Bakken (North Dakota) had burst and a year from then we would look back at how far the area has declined.  This occurred as expected and a few nights ago an evening news program visited the area and detailed what is occurring after 250,000 (!) jobs have been lost in the industry (not all in Bakken, of course).  This was one of the easier bubbles to call and watch on a daily and weekly basis unfold.  Those are fun when they occur:)

Lastly, with everyone bullish on the dollar for all of 2016, will February be the month we see a major top…..

Those are my initial thoughts and some predictions for the year.  I always welcome feedback, your thoughts, any articles you think I should read, etc.  Since 2008-2010, I have waited for 2015-2017 to have some interesting times (up years like 2011-2014 are simply boring).  This will be an interesting year!

Oh and yes nearer to election, I will tell you again (like in 2012) who will win and, like in 2012,  will see if I can get all 50 states right re the Electoral count and such.  Neither is as hard as you would think.

Happy New Year!


November 3, 2015 – I attended the 4th annual AEI/CRN conference last week.  Instead of me trying to summarize what all of the great speakers said, you can go to the link below to see the presentations.

The speakers and people in attendance are major players in the residential real estate industry.  They recognize the appraisal process is broken and the current appraisal report is basically useless.  Major change is needed and I believe it will be these people who make it occur.

I encourage you to take the time to listen to the presenters and read their presentations.


The email below is from the AEI:

Thank you for your interest and participation in AEI’s recent event “Fourth annual international conference on housing risk: New risk measures and their applications.” We wanted to share the event summary and video with you; please feel free to share these with friends or colleagues.You can also view all of the presentations from the conference.

Learn more about the Wealth Building Home Loan, Edward Pinto and Stephen Oliner’s revolutionary approach to low-income home finance, which has received rave reviews in The New York Times, The Washington Post, and Reuters, among other outlets.

Explore more of AEI’s work on issues related to housing risk at HousingRisk.org, the website of AEI’s International Center on Housing Risk, and don’t miss the November 23 briefing call with Steve Oliner and Ed Pinto to discuss this month’s release of the Mortgage Risk Index. Please contact Urbashee Paul to receive dial-in information for the conference call.

AEI is a community of scholars and supporters committed to expanding liberty, increasing individual opportunity, and strengthening free enterprise. To learn more about AEI, please bookmark AEI.org and visit often.

Yours cordially,

The AEI Events team

American Enterprise Institute for Public Policy Research
1150 Seventeenth Street, N.W.
Washington, D.C.20036


Market Value As Is is not always the same as Market Value

August 24, 2015 – I had this email exchange with a review appraiser today.  This is one of the situations where Market Value As Is and Market Value can differ.



I have a question regarding an appraisal that I am reviewing if you have a moment to help me out.  I am overthinking this and now can’t decide which is correct.
Background info:  The property is a large (100,000 SF) multi-tenant industrial building.  The client asked for “as is” and “as stabilized” values in the engagement letter.  The building is currently 30% vacant and the appraisal estimates stabilized to be 15%.  The appraisal also states that the building will achieve stabilization within the year.  Four of the tenants have rent increases within the next 12 months.  The appraisal utilizes the current rent roll at current rent levels, but increases the four tenants to their future rate.  In addition, rent for the vacant space is estimated at market levels.  Using these parameters, PGI is estimated.  Vacancy is set at 15%, expenses are subtracted.  The appraisal then has two below the line expenses for tenant improvements (assuming a 10-year amortization) and leasing commissions.  The resulting figure is capitalized into a value which the appraisal calls “as is”.  The appraisal further states that this is also “as stabilized” because the property will be stabilized within the year.
Here is where I feel that I’m over thinking this.  I know that the Income Approach is based on the principle of anticipation and that future income is to be considered.  So is the “as is” value the rent roll at current rent levels with no consideration toward the rental of the vacant space and no bumps in rates for the 4 tenants?  Or is the application noted above correct give the anticipation of future benefits?
I find it hard to believe that the “as is” and “as stabilized” can be the same value since the property is not currently stabilized.  However, given the principles of the Income Approach I can also see how this could be so.
Sorry for the long email.  I would appreciate any guidance you can give me on this.  I value your input.
On a side note, I have enjoyed reading your website and blog; very informing.

Thanks re the blog….appreciate it.
Regarding the As Is Value, the appraiser is wrong.  For a Market Value appraisal (non-Bank client), s/he may be right or wrong.
As Is means just that.  Deductions MUST be made for leasing commissions to go from 30% to 15% vacancy.  TI for that same space.  And lost income during the 12 months the space is leased.  And of course discounted for time.
The December 2010 Interagency Guidance states the following:

Partially Leased Buildings – For proposed and partially leased rental developments, the appraiser must make appropriate deductions and discounts to reflect that the property has not achieved stabilized occupancy. The appraisal analysis also should include consideration of the absorption of the unleased space. Appropriate deductions and discounts should include items such as leasing commission, rent losses, tenant improvements, and entrepreneurial profit, if such profit is not included in the discount rate.

I tell appraisers MV As Is different from Market Value.  In a general MV appraisal, MAYBE (only maybe) might the market not make deductions if they think all will be fine within a year.  Personally I would make deductions if buying your subject property, but optimistic investors may not.
However, for As Is appraisals the deductions MUST be made.
I think it would be fun for you to ask the appraiser for a list of names and numbers of people s/he talked to that said in a case like this they would not make any deductions for LC, TI, and rent loss.  Simply say you would like to talk to market investors and better understand their viewpoint:)  I seriously doubt you will be provided with a list of such contacts.
I hope this helps.

Adding value to the appraisal of the future – by Ed Pinto

August 24, 2015 – Ed Pinto of the American Enterprise Institute was a closing speaker at the Appraisal Institute’s national conference in Dallas a few weeks ago.  One of the new items he presented is summarized below.  As the title suggests, the idea is to make the appraisal of the future value-added – instead of simply providing Market Price as has been the case for the past 80 years.  The primary focus of Ed’s comments is residential appraising.

His ideas follow.  I will not add any commentary.  Just sharing the perspective from an independent party that is in contact with FHA, FNMA, Freddie Mac, etc – Ed was a prominent FNMA employee in the 1980s.

Determine (methodology):

–Market cycle history*

  • Create and review 10-year nominal and real home price trend to determine current position in market cycle relative to equilibrium
  • If the real price trend currently at equilibrium, robust comparable sales approach is likely appropriate.
  • If the real price trend currently elevated or depressed, the lesser of investment and replacement cost approaches is likely appropriate.

–History of buyer’s (>6 mo.) and or seller’s market (<=6 mo.) for existing homes**

  • Determine whether a buyer’s or seller’s market based on months of home inventory divided by listings/sales rate; determine whether a buyer’s or seller’s market
  • If real prices are increasing, it is almost certain that a seller’s market is present
  • Market disequilibrium more likely the longer an uninterrupted seller’s market continues

–Buying power due to change in power leverage**

  • AEI’s Center on Housing Risk plans to incorporate into its Mortgage Risk Index by year end

–Land value and change in land share trends**

  • Calculate land value by extraction using exchange value minus replacement cost

–Whether real price change due to leverage growth or improving utility or a mix

  • Evaluate role played by income leverage vs. fundamentals (i.e. job & real income growth)

*For the MSA, the subject property’s market area and price tier,(zip code or below), and the subject property

**For the MSA and the subject property’s market area and price tier (zip code or below)