The Appraisal Report and Approaches to Market Value
Q: Why can't the appraiser use information from banks that financed the properties in compiling an appraisal? It’s not likely that reports on specific comparable properties can be acquired but accessing reports similar to RMA industry / market reports where banks report the actual information on an anonymous basis without revealing the business being analyzed can be useful. This would be more accurate than calling commercial brokers that only give part of the story.
A: Appraisers use information from the Institute for Real Estate Management (IREM), which compiles rental revenues and operating expenses for CRE properties in various metropolitan areas. In this respect, the information is like that provided for commercial borrowers by the RMA in its Statement Studies.
The problem is that individual properties rarely fit an average or “normal” set of rental revenues or operating expenses. Therefore, even when armed with IREM data, the appraiser is still tasked with identifying those specific properties that are most comparable to the subject property and then making subjective adjustments accordingly. It is a very inexact process that still depends on the appraiser's judgment. Even so, this process is generally considered more realistic that using unadjusted average values from a broad metropolitan area.
Q: Is it common for a buyer to report their cap rate?
A: It depends on the buyer, but it is not uncommon. The real estate agent handling the sale is a more ready source of information about market cap rates and trends in most instances. The sales price for a specific transaction becomes public knowledge. The NOI is usually also well known before the sale since it is a key element in the overall transaction and available to all potential buyers.
In general, buyers are very much aware of the prevailing market cap rate and their individual desired cap rate since they will use those rates in many instances to evaluate a potential investment. Investors in an income-producing property will also compare the cap rates with investment returns in other classes of assets to assess risk and return. We'll approach this topic in more detail in subsequent sessions in this course.
Course overview: The Appraisal Report and Approaches to Market Value