Appraisals Are Deeply FlawedI recently wrote a column onHotelNewsNow stating that appraisal methodology was deeply flawedand that appraisals are essentially fairy tales based on a bunch ofunsupported wild guesses by appraisers. They claim to be able toproject cash flow, interest rates, discount rates, terminal valuecap rates, and renovation requirements for 10 years and then theyuse some unsupportable discount rate to determine present value. Itis all nothing more than wild guess compounded by more wild andunsupportable wild guesses. It short, appraisals to me, have novalue, and were clearly proven to be nothing more than propagandato support unrealistic loans in the 05-07 period.In response to thecolumn two appraisers commented that"appraisers are required by ourstandards and regulations to reflect the market. If the market isbeing optimistic we are required to reflect that. It is not theappraisers role to adjust projections or cap rates or values oropine if anticipated net income is not sustainable. We are merelyreporters on the sidelines. If you want us to tell you what wereally think then have us put our consulting hat on instead ofasking us to do an appraisal." Another appraiser said "we arerequired to reflect the froth".That says it clearly. Even theappraisers say their appraisals are nothing more than make believeto reflect what the clients wants them to say. In fact oneappraiser responded to my column by saying "who are we to questionthe view of the borrower or the lender". Why do appraiserseven bother with the make believe of 10 year cash flows, allegedterminal cap rates and all the rest. What they are admittingfinally is they are merely making all that up in order to get theanswer their client wanted in the first place. This is why when Icreated the first hotel CMBS programs in 1993 we refused in ourunderwriting to use any numbers or values the appraisers came with.We got appraisals just to fill the rating agency filefolder.Everyone would be much better to ask appraisers to providereal numbers and projections as the appraiser I quote above hassuggested. Phony appraisals was one of the contributors to how wehad the crash. They were used as excuses to make stupid loans. Therating agencies are the ones to drive this change. The servicerstell me they are relying much more on broker opinions of value thanappraisals and they only get appraisals because they are requiredto by the PSA docs.In 1993, our underwriting manual required theuse of historic cash flows and then current cap rates to determineloan proceeds. Loan to value was only used to make sure we did notexceed a percent of the appraised value since we knew the appraisedvalue was in excess of reality, we always wanted to below thattest.My intent here is to get the capital markets, the ratingagencies, and the real estate industry to start to use appraisersproperly, and to use their knowledge in a way that is helpful, andnot to support excessive lending and stupidity. If the truthhurts as to projections and value, then loan proceeds shouldreflect truth and not bull. If we redo how loans areunderwritten, and if we use the talents of the appraisers properly,we may just help save ourselves from the next crisis in the capitalmarkets. Excessive lending and over inflated values alwayslead to a crash-that is reality, so let's not repeat this costlyhistory.