The value of the property investment is the single most important piece of information to the Property Asset Manager. True mark-to-market value of each position in a portfolio is critical to the property fund’s market-timing strategy.
I find that a significant number of property appraisals are either incomplete or have biased values. The essence of desktop/online property appraisal is to ensure the logic and procedures used in the valuation report are valid and lead to a sound value conclusion; and, the appraisal report is complete and properly conveys the approach and data. The appraisal review consists of two steps; initially a desktop audit and then a field review if the appraisal is determined to be problematic.
A desktop audit is a low-cost initiative to review the appraisal report without a field inspection of the property and it is usually limited to the data presented in the valuation report. Specifically, the audit confirms:
- The property appraisal complies with the instructions provided by the client;
- There are no inconsistencies observed in the appraisal report;
- There is no faulty reasoning observed in the report;
- The appraised value is reasonable as compared to market benchmarks.
While desktop audits can be expensive through traditional channels, there are several business process outsourcing firms that do an excellent job at a very reasonable cost. If the appraisal desktop audit reveals the property or market data is questionable, a field review is performed through traditional property supply chain channels, or alternatively, a new appraisal report is ordered utilizing a different property appraiser/valuer.
Once the appraisal report is fully understood, I advocate that property fund managers perform a quarterly appraisal review by updating leases and by doing a mathematical construct to update the discount rate to reflect capital agent Kellyville market conditions. In rapidly changing markets, annual valuation updates by an independent appraiser are recommended; but, in stable markets, the quarterly update process is normally sufficient to perform value trending for up to two years without having to independently value the property. For institutional property funds, governance rules most often dictate valuation timing.
In conclusion, Property Asset Managers should not assume property appraisals are correct and should always initiate proper due-diligence measures. An appraisal desktop audit is an inexpensive initiative to confirm the appraisal report is properly prepared. Once the value shown in the property appraisal is verified, quarterly updates can easily be managed to regularly estimate property values.
Keith Roberson is the Managing Director of PropertyPERFORMAX, LLC., a leading provider of business process outsourcing services including lease administration, appraisal review, and property portfolio analytics. Having served as a senior manager with Fortune 100 companies in both corporate and commercial real estate, Mr. Roberson also serves as a speaker and coach in support of organizations desiring to create efficient property portfolios.