Real Estates Appraisal on Markets Affected by Crisis
Appraisal is a profession that is passing through a stressful period once again. If in the past the credit officers brought pressure to raise the value level, thus leading to customer satisfaction and raising the market share of bank, currently, the risk departments bring pressure to lower the appraised value, with the aim of protecting the bank and not granting risky loans under the current shortage of liquidity. Not many appraisers may face this stressful situation. The small appraisal companies created solely on this kind of services dependent on the partners in the banking area are most affected. Even the large companies feel the pressure to provide made to order appraisals for important investors greedy of funding.
The solution should appear from among the profession, by choosing the appropriate methods in accordance with the standards. To use the market comparison method, very useful for the active markets, might be an error when the transactions are quasi-blocked. Instead, it may become useful again the cost method, particularly for the new developments. Taking into consideration the substitution, an important appraisal principle, and also the new consistent information, through this method there can be obtained values more appropriate for the time being which should satisfy both customers and banks.
As regards the income based methods, it should be considered the pronounced decrease in rents and prices of trading, the two variables – the rate of capitalization and the transaction price – being currently very volatile and largely influencing value. In this situation, the most appropriate would be to work with updated rates of rents, where the update rate (the risk) may, more reasonably, take into account the situation, noted that the forecasts are, also in this case, difficult to estimate. However, with appropriate instruments they may become more reliable.
I think at this point the residual method is the most difficult to apply. Since it is based on many volatile variables and future appraisals difficult to be sustained now, it may be useful only as a complementary method and it is not indicated for use in loans with real estate collaterals, particularly lands.
In connection with these clarifications, I anticipate the need for discussions between the assessors’ community (ANEVAR) and the banks (ARB) in order to harmonize the positions of donors and the experts-appraisers consultants.
However, the crisis will lead to important changes in the financial industry landscape through more severe regulations and adjustment to reality. This will also affect the field of appraisal consultancy, where the professional association’s position should have a key role.
Dr. ec. Adrian Crivii, MAA, FRICS