According to a recent study, faulty property appraisals-thought to be behind excessive purchase prices in various markets-may be a common occurrence in the commercial real estate market. The study, which used data from thousands of securitized real estate bonds in which properties were foreclosed and liquidated, found a substantially wide discrepancy between appraisal values and sales prices on properties examined.
Generally speaking, appraisals tend to overvalue properties. Of the 2,076 properties evaluated, 64 percent were appraised at values exceeding the eventual sale price, while 35.5 percent were appraised at less than the sale price. At the one extreme, there were 121 instances where the appraised value was over double the sale price. In 131 instances, the appraisal value was less than 70 percent of the sale price.
The findings confirmed what many have found anecdotally, that appraisals are not very accurate. The study is important because appraisals play an important part in many aspects of real estate deals, from deciding whether to originate a loan, work out a loan, buy or sell the property, or to file for bankruptcy. Unfortunately, a bad appraisal can cause a lot of problems.
Some say commoditization of the appraisal industry is behind the problem, and that lenders often see appraisals as something to purchase and the expertise of the appraiser is not emphasized.
Some have questioned the way the study was conducted, though, since the sale price isn’t a good way to evaluate whether the appraisal was accurate. Even if that were true, though, inaccurate appraisals can have a significant impact on the commercial real estate market, particularly on lenders.
Obviously, the way this problem is addressed will likely have a large impact on the commercial real estate market.
Source: New York Times, “Accuracy of Appraisals Is Spotty, Study Says,” Julie Satow, May 8, 2012