Sunday, December 18, 2011

The Weakest Link in Appraisal/Valuation Reports is the Information Supplied by the Property Owner

Do not hire this kind of appraiser.

Some of my previous blog posts have touched upon this subject, whether it was the Jakko Poyry forest valuation report that SinoForest investors relied upon to their detriment (including John Paulson, who lost more than half a billion dollars), or the valuation report relying on false financial statements in the case of the Beijing Gateway Plaza fraud, or the Costa Rican appraisal report based on false representations of the property having full development entitlements.

The commonality in these instances was that an appraiser or valuer unwittingly relied upon false statements made by a property owner, resulting in a flawed valuation.

One thing missing from real estate appraisal and valuation textbooks is a statement of one fundamental human truth: People lie.

Because an appraisal or valuation report is often used to gain financing or to lessen taxes, appraisers should expect to be lied to. Most appraisers don’t seem to care about this, though, instead filling their reports with multiple disclaimers and limiting conditions. We are even taught that this is good appraising. In most English language valuation reports, for instance, one finds a standard exculpatory statement such as the following:

No responsibility is assumed for accuracy of information furnished by the property owner.”

This is the Achilles heel of the appraisal profession throughout the world –-acceptance of inaccurate information from biased parties without verification. Some appraisers in high places even contend that it is not an appraiser or valuer's responsibility to verify such information. "Who am I, the fact police?" asked one. Yes, you should be.

Last week I was appraising an isolated “cave lodge” in hillbilly country. A New York area hotel valuation firm came in before and appraised it for $5 million based on the owner’s representations of renting it out at nightly rates of $1000 to $1800 for more than 85% of the year, with annual revenues of $368,200. No efforts were made to verify these revenues despite their implausibility and lack of customary expense categories, such as Payroll expense.

I asked for tax returns, both Federal income tax and state sales tax returns, and got a runaround with plenty of excuses and contradictions. The owner finally admitted that he has paid no sales taxes on his lodging revenues, and the only Federal tax return produced indicated revenues of about $36,000, or about 10% of what was previously represented.

My favorite tall tale was when the owner told me that Cher had rented the place for a Halloween party last year. He should have picked a more mysterious celebrity, as Cher is a known concert performer, and it has been well established that she performed in Las Vegas (more than 1500 miles away) on Halloween night last year, and there are unauthorized YouTube videos to prove it.

A few weeks ago I was also asked to look at a vacant, 85-year-old multi-story warehouse. Two appraisers had relied on the owner’s representations and had made “extraordinary assumptions” that the elevators were operational (they were not) and relied on owner representations of “clear height” (the height to which goods can be stacked) and building area, apparently not measuring the building. Although the warehouse had been purchased for $430,000 in 2005, at the top of the market, and has remained vacant and unsold since then (having been listed for sale and lease in the mean time), both appraisers now estimated value to be about $2 million.


An appraisal or a valuation is only as good as the data and assumptions that it relies upon. Garbage in, garbage out. It is time for users of valuation services to ask questions about the reports they rely upon, questions such as “How did you verify this?”