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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Tuesday, May 29, 2012

Appraisal of a Condo Project in Harlem

I normally limit posts on this blog to my international work, although 60% of my work is domestic. I do not expect most readers to be interested, though, in California trailer parks or failed residential subdivisions. Sure, there are some interesting stories to be told, as each trailer can have a story of human misery or else a meth lab waiting to explode, and the subdivision was a possible flipping fraud that contributed to a Utah bank failure. But if I wrote about these things I could no longer call this blog “International Appraiser”.

I do think that New York’s Harlem neighborhood is worth talking about, though, as it is world-famous and one of the brightest spots I have recently seen in the U.S. housing market. Harlem is a neighborhood in northern Manhattan with a tough reputation.

I was born in New York City. My father studied at Columbia University, next to Harlem, and one of my early childhood memories was often waking up in the middle of the night to find my mother staring out my bedroom window at the bus stop, waiting for my father to return home safely. She told me that gangs in Harlem had initiation rites that included shooting or maiming a white man. This was only a few years after West Side Story had become a hit Broadway musical.

Fast forward to year 2001, and that is when the world first got a glimpse of a Harlem renaissance. That was the year that former president Bill Clinton established his office on 125th Street in Harlem.

New York City has been blessed with a period of good government and good policing, and Harlem has become a neighborhood secure enough for anyone to live in. As I watched out my window at the Aloft by W Hotel in Harlem, I saw a rich diversity of residents, from poor to prosperous, black to white, all walking at night without fear or conflict. I walked by the famed Apollo Theater to find the sidewalk in front mobbed by camera-wielding tourists and a line of white people waiting to get into this historic Black theater. I dined at a French restaurant where there were many men in suits.

I recently appraised a failed condo project in Harlem. This was partially completed new construction, with the exterior façade already finished. The loan applicant in this instance was actually the foreclosing lender, a very entrepreneurial firm which had the staffing resources to complete the development of the project.

This was not a case, though, of Harlem being not yet ready for condos. There have been a number of condo projects already completed and sold out, including a large project across the street from the subject, where the last sale was a one bedroom condo selling for $365,000. A check of the MLS showed only 3 units for sale in this zip code, with prices starting at $329,000.

It should come as no surprise, though, that Harlem has become a seller’s market for condos. You can’t keep a good location down forever, and Harlem fits the urban geographer’s classic model of decay followed by renewal. Harlem is just a few minutes farther by subway from Midtown or Downtown jobs than the Upper East Side or Upper West Side, yet where else in Manhattan can one buy a new condo for $365,000? This is about half the price one would pay for a comparable-quality unit in one of Manhattan’s established white collar neighborhoods, and the shortage of affordable housing in Manhattan has been a constant complaint of middle class professionals working there.

The prevailing shortage of housing in Manhattan and Harlem’s gentrification and convenient location has thus created good residential development and investment opportunities.

PS: The construction loan was funded by Kennedy Funding of Englewood Cliffs, NJ.

Friday, May 18, 2012

The International Appraiser in the press – Germany, Costa Rica, Canada

In the March 2012 issue of Canadian Real Estate Magazine, reporter Sarah Megginson interviewed me for advice to Canadian investors about purchasing individual residences in the U.S. My comments were that the most satisfied Canadian buyers were the ones buying residences for their own use (typically winter vacation use) and to be careful to avoid “guaranteed rental income” scams for investment properties in poor or vacant neighborhoods of overbuilt cities in Nevada, Arizona and Florida.

German architectural magazine Detail published one of my many photos (see above) of the New South China Mall in Dongguan, China in their April 10th story, “Die 10 größten Shopping Center der Welt” (“The 10 largest shopping centers in the world”). My post on the New South China Mall continues to be my most read post. If you look to the right, there are thumbnails of my posts in rank order of weekly popularity, from top to bottom. Another popular post is "Costa Rican Teak Farms for Gringo Investors".

Tico Times, the English-speaking newspaper of Costa Rica, recently interviewed me for a story published today (May 18), entitled “Investors: Where’s Our Money?”, which discusses the litany of investor complaints against Tropical American Tree Farms, an American-owned company in Costa Rica that sold individual teak trees with “certificates of ownership” having no legal standing in Costa Rican courts, and because the company purports to sell “trees” rather than “investments”, it is not subject to securities regulators in Costa Rica or the U.S.
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