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Are You Choosing the Right Appraiser to Value Apartments?

Digested From “Are You Choosing Right Appraiser to Value Multifamily Assets?”
Real Estate Weekly (10/30/13) Sanders, Jerry

A good appraisal reflects the impact of market trends on asset value.  An appraiser who lacks the experience and/or skills to correctly read the market may miscalculate the upside potential that is such an important component of property value.  The risk of such miscalculations has increased this year, because of a widely held perception that the apartment sector is overheated.  With more than $84 billion invested in multifamily housing transactions last year, the sector accounted for more than 25 percent of all commercial property transactions.  Many inexperienced appraisers, believing the apartment sector may be universally overheated, are now hesitant to conclude current values are sustainable even when sound valuation principles support those high values.  

The depth and breadth of an appraiser’s responses to four basic questions can help to determine whether an apartment community appraisal is in capable hands.  These questions range from "How do market fundamentals, or the supply and demand factors that drive long-term property value, relate to the property?" and "Who are the potential buyers for this property?" to "How do those buyers typically add value to acquired properties?" and "How will the appraiser factor answers to the previous three questions into his or her assumptions and into the property’s risk-adjusted return for valuation purposes?"  

Just because a market is not a gateway city like Washington, D.C., or New York City with high barriers to entry does not mean that it lacks sound long-term fundamentals.  In fact, a look at the NCREIF Property Index published earlier in the year shows that a number of secondary markets produce the highest risk-adjusted returns.  NCREIF research shows that Texas accounts for three of the top seven risk-adjusted market returns.  Additionally, the Urban Land Institute has included Austin to the hot market list due to the demand created by growth in the energy and technology industries.  In determining demand for an apartment community, appraisers typically consider population growth, demographics job growth, education levels, household income growth, and the property's relative desirability with respect to competing assets.  The latter would reflect everything from local schools to crime rates.  It is the appraiser's task to analyze and relate demand factors directly to the submarket and the subject property.

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