Thursday, May 31, 2012

Tepotzotlan, Mexico, revisited: The Danger of Hypothetical Conditions in Appraisals

Maybe once a year I get feedback from a client such as this: “We hired an internationally famous brokerage firm to revalue the property you appraised and they estimated a value 15 times as high as yours. Explain yourself.”

Such was the case recently with my previous valuation of land at the periphery of Mexico City. The appraisers were from the Mexico City office of an international appraisal firm being sued for malpractice for billions of dollars in the U.S.

Presented with the new valuation report, I found the reasons for the difference in value to be obvious. The appraiser made an assumption that the property would be rezoned at 12 times its current allowed density, permitting development of 1206 dwellings on a 26-hectare site. Such an assumption would be labeled as a “hypothetical condition” in a U.S. appraisal report, but it wasn’t in this Mexican report. (The neighboring subdivision built 18 homes before going bankrupt.)

My client never instructed them to assume such a hypothetical condition. I wondered if the loan applicant instructed them to make such an assumption, although the loan applicant never asked me to. In discussing the zoning, I even asked him, “So the current zoning allows you to build 104 dwellings, right?” to which he responded, “Yes, but because of the topography we can only physically build 80 homes.” Forced into a conference call with the appraisers, two things became apparent:

1. The appraiser never met the borrower or owner of the property, but only the mortgage broker, who told the appraiser that the property was about to be rezoned.

2. Although three appraisers signed the report, including an MAI in Chicago, it was only the most junior appraiser who actually visited the property.

I had a similar situation earlier this year, in which a brokerage firm’s appraiser did her inspection of raw land in the Dominican Republic from a helicopter and photographed and described the wrong property, possibly due to being steered by the property owner. It almost seems that the major brokerage firms do not care about their valuation clients.

My hard money lender clients always instruct me to appraise “as is”. The municipality of Tepotzotlan issues “Certificates of Zoning Information”, and the position I made in the teleconference is that I appraise according to present Certificate of Zoning Information until a new Certificate of Zoning Information is issued. This particular client agreed, stating “Please don’t assume anything”.

This post is not meant to criticize Mexican appraisers, as the problem is the same in the USA. Appraisers are too quick to believe statements such as “we will be getting final subdivision approval any day now” or “the elevators will all be fixed tomorrow”. It places lenders at risk and the appraisers at risk of being sued. Also see my post on "professional responsibility".
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2 comments:

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