Appraisers Play Key Role In Assisting Investors

There's increasing evidence that the ideal time for investing in distressed real estate assets may be fast approaching. The Mortgage Bankers Association recently reported that private equity investors are poised for a sharp increase in distressed asset opportunities. Sam Zell, for instance, has reportely created a $625- million private equity fund targeting distressed commercial securities. And according to the Wall Street Journal, Vornado Realty Trust plans to spend $1 billion on distressed properties in the coming years.

Investors realize their greatest returns when they purchase property at the right price. And a properly supported appraisal provides critical acquisition guidance. In performing valuations of any property, appraisers analyze the highest and best use. This is particularly important for distressed properties.

As always, this includes reviewing the four basic tenets of highest and best use: physical possibility, legal permissibility, financial feasibility and maximum productivity. This study should quantify why the property is distressed. It should also indicate what actions, if any, are required for owners to make the asset profitable again.

Appraisers also recognize profit potential when performing valuations of distressed properties. Profit, after all, is what drives investors to take on the risks associated with investing. A qualified, experienced appraiser realizes that forecasting returns requires proper judgment to determine what would lead an investor to buy a distressed property. The key for appraisers is to focus on the dollar amount, as opposed to the percentage, when estimating profit. An experienced appraiser also understands the difference between "as is" market valuation methods and a property's "as stabilized" market value estimate. When providing debt financing, most financial institutions must focus on the "as is" market value estimate, derived from the asset's worth as of the effective date of appraisal. There is a critical need for market analysis and caution when quantifying supply-demand relationships. Job growth is a key determinant of demand for most real estate uses. Outside of a few select markets, there has been negative job growth the past 12 to 18 months with little forecasted growth for the foreseeable future. Consequently, appraisers have to look at the history of an entire real estate cycle, such as 1991 to 1998, and not just the past year or two. Of equal importance is how to forecast base rent, which is affected by supply-demand considerations. Revenue forecasting is contingent upon reviewing individual markets. Concessions in the past year have become prevalent in most markets, impacting the effective rents of almost every property type. When deciding whom to work with, investors should consider an appraiser's professional affiliations, education, experience and designations. With so much at stake, it's important to hire qualified, experienced appraisers.

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