Friday, June 3, 2011
Costa Rican and Mexican appraisals
I am more often asked to review local appraisals from Mexico and Costa Rica than I am asked to appraise in those countries, as most clients are cost-conscious. Appraisal reports look very different in Mexico and Costa Rica than in the U.S. and Canada. These are the major differences I see between Central American and North American appraisals and appraisers:
1. An appraiser in Mexico or Costa Rica is likely to be an engineer or an architect. In this respect, Central American appraisers generally have more relevant college degrees as compared with North America, where any college degree, no matter how irrelevant, meets the criteria for designations and certifications. They tend to be very precise in their measurements, too.
2. Most Central American appraisal reports are delivered in Spanish, and few appraisers speak English. On the other hand, almost any successful real estate broker in either country is likely to speak English.
3. A Central American appraisal report presents no market data or comparable sales. This reduces the incentive to perform market research, and market research is particularly difficult in these countries because of the inaccuracy of public records, as the sales prices that are recorded are often a fiction serving the agenda of buyers or sellers, usually to avoid taxes.
4. Central American appraisers, probably because of their architecture or engineering backgrounds, seem to rely too much on the Cost Approach, which is land value + replacement cost – depreciation. Nowadays, many properties are selling at below cost as a result of economic depreciation (oversupply), but an appraiser not measuring market trends might only measure physical depreciation and nothing else, so the Cost Approaches end up being high.
5. Ethical standards for Central American appraisers appear to be low. Most appraisals I have seen have had inflated value estimates serving the clients who hired them; I often find this out when I find the property advertised for sale on the Internet for a price well below appraised value. One firm claims to deliver MAI appraisals, but there are no MAI appraisers in Costa Rica. Some brokers offer “free appraisals”. Right.
6. When U.S. appraisers perform valuations in these countries, they often do not include comparable sales, either, and instead construct a discounted cash flow model based on assumptions not fully validated through market research. The results of a DCF analysis can vary significantly based on the assumptions used in the DCF model.
Is there an appraiser who includes comparable sales and listings in his Mexican and Costa Rican appraisal reports? Yes. I do. After all, what good is an appraisal that does not rely on comps?
Vernon Martin, the founding principal of American Property Research, performs paid research, due diligence and valuations regarding commercial real estate throughout the world. He has 30 years of commercial appraisal experience and has worked in 21 countries, 42 U.S. states, and four Canadian provinces. He was previously the chief commercial appraiser at 3 national (U.S.) lending institutions, formerly taught Real Estate Valuation at California State University, Los Angeles and has authored many professional journal articles and two books. He has degrees from the University of Chicago and Southern Methodist University and is a Certified General Appraiser. For more information, call 1-323-788-1605, or e-mail him at vm@AmericanPropertyResearch.com.