The Most Common Fatal Flaw in Discounted Cash Flow Analysis

 

I entered the appraisal profession at an opportune time – in the mid-1980s, when discounted cash flow (DCF) analysis had come into vogue in the real estate industry.  The crowning moment for DCF’s new place in real estate investment analysis became apparent in the purchase of the Pan Am building (now the Met Life building) in New York in early 1981.  The price paid shocked many, as it reflected a “going-in” capitalization rate of just 4% for an 18-year-old building in a time of very high consumer price inflation and very high interest rates.

Manhattan was just awakening, though, from a 1970s stagflation-induced real estate coma of no new construction, and the rapid expansion of the financial industry brought the Manhattan office market to full occupancy, with office rents increasing 50% from early 1979 to the end of 1980.  The buyers of the Pan Am Building relied on a DCF model based on cash flow projections for years into the future, anticipating the ability to re-lease space at much higher rental rates.  In this context, the purchase price was justified.

I was recruited out of graduate school by Jones Lang Wootton, where I was promptly put to work creating DCF models for regional malls and high-rise office buildings owned by their institutional clients.  Because JLW was a full service real estate firm which managed many institutional properties, I had access to many property operating histories. Seeing these operating histories and also consulting publications from IREM (Institute of Real Estate Management) and BOMA (Building Owners and Managers Association), it became obvious that over the life of a commercial building, expenses increase faster than rents.

This can be graphically demonstrated by a typical subset of BOMA data in Figure 1, and is equally supported by IREM data for other property types as retail centers and apartment buildings.  Notice how the line representing the operating expense ratio for each age subcategory increases in slope relative to gross income.  The numerator, Expenses, is increasing faster than the denominator, Gross Income.  This is a graphical proof of expenses increasing faster than income for income properties. Why does this almost always happen?  Because buildings are deteriorating assets.

                              

                                                           FIGURE 1

Data from BOMA (Building Owners and Managers Association)

There is a logical reason for this. As a building ages, it becomes less competitive in its marketplace and the rate of rental increase slows, while the aging of the property requires increasing maintenance and capital improvements expenditures. This is the reality of physical and functional obsolescence.

The natural end of the economic life of a building is when expenses finally exceed collectible income. If expenses typically grew no faster than income, on the other hand, no building would become obsolete. That would be nice for building owners, but the real world does not operate in this manner.

DCF models which forecast expense growth to be the same rate as consumer price inflation are therefore fundamentally wrong and overly optimistic.

The above graph, indicating the typical pattern of expenses increasing faster than income for income properties, was originally intended to be part of my book (see sidebar) for the Appraisal Institute, but was not allowed by the editors, as the Appraisal Institute maintained that income and expenses increase at the same inflation rate over the long run. This was in 2011.

Nowadays, in year 2025, the truth is increasingly taught by appraisal educators and real-life managers at major firms, but some appraisers have not yet caught on because they were taught wrong earlier in their careers.

A building is a deteriorating asset. There are two forces governing expense growth – price inflation and increasing maintenance and capital improvement needs. This places the rate of expense growth higher than price inflation alone. This is the same reason that your new car depreciates so quickly.

Why is this matter so important? Most DCF models project 11 years of cash flows, and the underestimation of expense growth gets compounded, resulting in serious overvaluation.

One of my fellow Appraisal Institute authors, Howard Gelbtuch, assembled and edited an enlightening book in 2011 entitled Real Estate Valuation in Global Markets, in which highly decorated appraisers and valuers from many nations explained how real estate valuation is done in their countries. Once again, most who presented DCF models had final year operating expense ratios lower than beginning expense ratios. Many of the violators were Western nations that are considered financially sophisticated. Nations getting it wrong were:

Belgium, Canada, Czech Republic, Denmark, France, Germany, Hong Kong, Italy, New Zealand, Poland, Portugal, Saudi Arabia, Spain, Sweden, Taiwan and Turkey.

Which nations got it right? Nations less likely to be considered part of the supposedly sophisticated Western herdthink:

Argentina, Bulgaria, Chile, Indonesia, Japan, Romania, South Korea, and the Turks and Caicos Islands.

Getting beaten by the likes of Bulgaria in DCF analysis should shame appraisers and valuers from the more affluent Western nations into "stepping up their game", if they haven't already done so.

Even the author of the book, who wrote the section on appraisal practice in the United States, failed to consider increasing operating expense ratios in his own DCF projection, in which his operating expense ratios remained stationary. Bear in mind though, that this book reflected appraisal practice at the time it was written in 2011.  Time for an update?

PS: I originally wrote this post in 2014.

My Part in a Successful Arbitration Against a Sovereign Nation

 

No, this is not about the Korean situation I was handling before, in which the Municipal Government of Seoul underpays property owners in an out-of-control eminent domain system.

There are actually sovereign nations within the United States of America, known as Indian Reservations.

By U.S. law, Indian Reservation land cannot be sold to outsiders, so to have some type of real estate interest on the reservation, the outside investor needs to lease the land, and the ownership interest is called a “leasehold interest”. This is how one obtains a valid real estate interest on an Indian reservation or elsewhere such as Hawaii or the Zona Maritima in Costa Rica. This is often done on Indian reservations by developers of gambling casinos, for instance.

In this particular case, a client of mine wished to build an industrial park on an ideally located section of an Indian Reservation, and then he divided the proposed park into pieces to lease out to three willing outside tenants. What he possessed, as a leasehold landlord, is commonly known as “sandwich leasehold interests”. He pays rent to the Reservation, but in turn was already collecting rents from 2 of the 3 tenants who want to develop buildings on the property that he leases from the Reservation. It was a very profitable arrangement.

The Reservation changed their mind and broke their contract after my client had spent 5 years and over $2 million assembling this deal. Contract disputes with Indian reservations are typically handled by Arbitration as typically established in contracts such as these.

I was hired to estimate the value of the leasehold interest as of the date of the breach of contract in August 2020. Tens of millions of dollars were already expected in rents. The irony of this breach of contract is that my client agreed to divide profits with the reservation at 50%.  At present, no one is making any money except lawyers and me.

My client has won the arbitration but is now awaiting the computation of the award and damages.

P.S.  Here is my Oklahoma grandfather, who I am named after, who claimed to be part Cherokee. That is a Kiowa war bonnet that he is wearing. The Cherokees renounced war in their treaty with President George Washington, in turn for his declaring them a "Civilized Tribe".

What Isn't Said About Living and Owning Real Estate in Costa Rica

 I have been appraising in Costa Rica since 2009, and have usually found myself appraising failed residential subdivisions meant for affluent immigrants from North America.  Then there were teak farm scams, too. 

There is a huge industry aimed at selling Costa Rican real estate to North Americans, exemplified by such publications as International Living and Real Estate Trend Alert [Ronan McMahon]. It is important to remember that these are sales organizations which present only the positives of living in Costa Rica, a land of natural beauty sometimes described as "the land of rainbows and unicorns". And it is not true, despite what Ronan says, that Costa Rica is running out of land.

Yet many Americans return disappointed from Costa Rica.  There are no official numbers.  Unofficially, I have heard estimates that between one-third and one half of American immigrants return home from Costa Rica. There are an estimated 120,000 Americans living there now.

Yesterday I watched a podcast on MSN.com by Kristin Wilson, an international realtor who lived in Costa Rica for 8 years and only recently came back home, and she compiled a list of 8 reasons why Americans return, and some of these reasons I have also observed, but I haven't actually lived there so I encourage you to watch the podcast. You can find her full report at: 

https://www.bing.com/videos/riverview/relatedvideo?q=kristin+costa+riica&mid=9D793F3EED243527C1269D793F3EED243527C126&FORM=VIRE

Here are some added comments of my own on the reasons Americans leave:

1. Cost of living. First of all, living in tropical lowlands requires year-round air conditioning if one wants to live in American-style comfort, costing several hundred dollars per month. Most goods also have to be imported and Costa Rican tariffs are high. It will cost more to own a car in Costa Rica than in the U.S. If wants to live the US standard of living, there may be no cost savings and perhaps even some cost surprises.

Costa Ricans often live a lot more cheaply by living in small homes at higher elevations.  Below, for instance, is a realtor ad for a "Tico Home" in the uplands of Guanacaste, perhaps the physically hottest area of Costa Rica (temperatures near 100 degrees F when I visited in February).  These are simpler homes that are built from local materials and don't typically have air conditioning or heating, but at higher elevations, such utilities might not be necessary. But it might be a long walk to the beach, and where will you find a Wal-Mart?

2. Crime. Official crime statistics suggest that Costa Rica is a nation with a low crime rate, but one forgets that being a rich gringo can make one a target. Reading expat forums, I sometimes read alarming things like "I got robbed at gunpoint in broad daylight on the National Highway!", police shakedowns of tourists, and there have been many reports of how gringos are followed by robbers after renting their car at the airport, particularly after dark. Kristin also chronicles her many car break-ins and one or more home burglaries, and carries around a decoy wallet.

3. Health issues.  This seems surprising when one sees the number of hospitals near the Liberia and San Jose airports, hospitals built for North Americans wanting to save money on medical or even dental procedures, and I have been assured that most of the doctors are English-speaking and U.S.-trained. One notices, though, that these hospitals often focus on elective surgeries, those not covered by insurance, such as cosmetic surgery.

Considering that many of the expats are retirees, though, one has to plan for increasing health problems in the future.  U.S. Medicare is not available down there, and end-of-life health issues can force Americans to return home for seriously expensive situations such as cancer, heart surgery, etc.  I went through cancer last year and was glad for my Medicare here in the U.S.. 

4. Unstable infrastructure.  This may include power outages, cable outages, water outages, and impassable roads during rainy months.

5.  Property scams.  The first time I heard about this, it was a friend of mine who sold his business and arranged to purchase a cliffside home and restaurant through a local lawyer. The lawyer was corrupt and was working a scam with someone who didn't even own the property. In another instance, I had an American absentee landowner find his properties occupied by squatters, and he spent several years fighting to get his property back in the Costa Rica courts, which often honor squatter's rights over the rights of foreigners who are not even using the land. The squatters' lawyer was allegedly building and renting billboards on the land.

Get a title insurance policy if you possibly can, too. My friend lost over $100,000 and had to go back to work in the U.S.

6. The climate speaks for itself. These are the tropics and there can be plenty of heat, humidity and rain which some Americans don't care for. Costa Rica is outside the hurricane region, however.

7. Finally, some expats just feel the isolation from family and loved ones living so far from the U.S. and reprioritize what they find more important in life -- family or beaches?

Depth Matters: Appraisals of prospective ports

Bahia de Mariel, Cuba

Over the years I have sometimes been sent to the Caribbean to appraise proposed ports for cruise ships or container ships. Other appraisers failed to pursue feasibility studies, but there are some basics that need to be considered.

First and foremost is the depth of the water.

Today’s cruise ships have drafts (distance below the water) of up to 33 feet. Think Royal Caribbean.

Container ships are much heavier (due to cargo rather than vacationers) and have drafts up to 50 feet.

Then one must consider obstacles on the sea surface, such as boat wrecks or just abandoned refrigerators. American shippers estimate an extra 6 feet for these obstacles. Russian sailors recommend 7 feet.

When I worked for hard money lenders, I sometimes had to deal with jokers who pretended that their bays could be converted to world class cruise ship ports or even cargo ship ports, with accompanying warehouses or luxury resorts.

One particular memory was Guanica Bay, Puerto Rico. Read the original blog post here:

https://www.internationalappraiser.com/search?q=puerto+rico

The gist of the story is that Guanica Bay had a depth of only 29 feet, which was an obstacle to the larger cruise ships. Subtracting 7 feet reduces maximum draft to just 22 feet. The turbidity of the water, furthermore, reduced the attractiveness of the proposed beach resort.

Cuba recently renovated its Mariel Bay (remember the Marielitos emigration of 1980) at a cost of more than one billion dollars (financed by Brazil) to create an internationally competitive port, so near the U.S., with a minimum depth of 58 feet.  A century ago this bay had an average depth of less than 20 feet.

In summary, depth matters, water quality matters, and be sure that all the required permits are in place, no matter what country you are in.

Update on the New South China Mall

I do see one person now, who appears to be a groundskeeper, standing to the right of a yellow object.

In the 15-year history of my blog, my previous post from May 2011 on this mall https://www.internationalappraiser.com/search?q=china+mall has been read more than 50,000 times.  The gist of the story was that a Chinese instant noodle billionaire decided to build the world's largest mall outside Dongguan, China. With over 9 million square feet of building area, he was planning on placing 2350 tenants. At the time of my arrival on 5/13/11, there were three tenants: KFC, McDonalds, and Kung Fu, a Chinese fast food franchise. There was also an amusement park set among hundreds of meters of canals, and on the day of my visit, it was filled with several dozen friendly secondary school students.

As I explained then, the mall was built on farmland near a city composed mainly of poor migrant laborers who built cheap cabinets, shelves and furniture, people who did not have the time or money to be mall shoppers. Access was inadequate. The Dongguan rail station was 55 minutes away and the closest bus station was one mile away.  There were tollways leading here, but the local residents could not afford the tolls or even cars. A recent YouTube video (shot in 2024) by a charming British couple (aka NICO), confirmed that there is still no public transportation to this mall. See their guided tour at https://www.youtube.com/watch?v=gyS_ZNkSTOA .

The mall has suffered for years. Once adorned with beautiful canals reminiscent of the San Antonio RiverWalk in Texas, the inability to control algae growth forced the decision to fill in the canals with concrete.

Development continued in 2015 and then 2018, and the mall was able to achieve greater than half occupancy on the ground floor:

On the other hand the upper floors continue to fail to lease up:

And the amusement park that attracted so many middle class Chinese customers has recently shut down:

Now that local factories are closing due to economic reasons (cheaper competitors and Trump tariffs), there may be more headwinds against this enormous shopping mall.

Mall management claims an occupancy rate of 98%.  Based on the photos my estimate is 15%.

Expert Witness Testimony on Foreign Real Estate

 

US citizen resists Korean eminent domain

Why does an American real estate appraiser like me get hired to testify on foreign properties?  The answer is the U.S. Court System.  They don’t require American appraisers, but they need English-language testimony for a legal action in a U.S. court or arbitration, testimony supportable by the Uniform Standards of Professional Appraisal Practice (USPAP). Nowadays there is new technology like Zoom that allows foreign appraisers to testify from afar, but a foreign appraiser might need a translator and may not have the English language skills to testify in a U.S. court and survive “Cross Examination”, nor might they have a solid understanding of USPAP.

Much of my testimony has to do with estate or divorce actions, eminent domain or tax reasons. The question being asked is “What is the value of the property being litigated”?  USPAP is important in these actions in the U.S.

In my last testimony, back in April, for arbitration purposes, the defendant/opponent was an American Indian Reservation, not subject to U.S. law. Their lawyers were American but unfamiliar with USPAP.  When they cross-examined me they went straight to their perceived opinion of the character of my client.  I had to point out that USPAP requires me to estimate the price that the property would receive in an open market, what it would be worth to the next owner.  The present ownership is irrelevant, as I explained, but I disagreed with their assessment of my client’s character without stating it, because it was irrelevant, and he was an excellent client.

Four years ago I was testifying in a divorce trial for an American couple in which the husband developed luxury lodging in Costa Rica. I was hired by the wife’s attorney. The husband left her for a younger woman.  His defense was he didn’t even own the land that he was building the property on (leasehold interest), but I pointed out that that the property was located on highly desirable land in the Zona Maritima, the closest Costa Rican land to the publicly owned beach. These leasehold interests in Costa Rica have high value. I don’t think the husband could find a Costa Rican appraiser who spoke English.

Eight years ago, I was defending a naturalized U.S. citizen of Korean origin whose property was being seized by eminent domain by the Seoul Municipal Government. Seoul uses a CAMA (Computer-Aided-Mass-Appraisal) System as many American municipalities use. I went to a conference hosted by the Korean Association of Property Appraisers, whose proceedings were published in Korean, Japanese, Chinese and English and found an article quite explanatory of the flaws in the Seoul CAMA system.  The Korean lawyer who hired me also gave me an excellent book entitled “Eminent Domain: a Comparative Perspective”, written by three scholars, two of which are Korean: Iljoong Kim, Hojun Lee and Ilya Somin.

To be brief, the Seoul CAMA system is based on multiple regression analysis, as many CAMA systems are, and as a former statistician myself, I found myself confused that they seemed to be using one equation for the whole metropolitan area.  Real estate sales are public in Seoul, and I found that homes in this neighborhood had been selling for three times assessed value, but condemnation compensation was occurring at only one-third of market value as a result, because the taking was done at "announced value". 

Disputes by U.S. citizens against the Republic of Korea go to arbitration by treaty. I wrote a report that was supposed to be presented with my testimony at the Hong Kong International Arbitration Centre in Hong Kong (the closest English-speaking arbitration authority in Asia), but her case was thrown out on technicalities.  The Republic of Korea is a democracy that heavily favors it largest corporations and real estate developers. The bottom line was that she was offered about $700,000 for a home that would sell for $2 million. Most of her neighbors were treated the same. Because Korean appraisers are dependent upon government licensing, and the same agency that "announces" values is the agency that regulates appraisers, no Korean appraiser would take this case. That is why I was involved.

 

“Top Appraisal Blog” Award for “The International Appraiser” from Feedstock.com

 

I proudly present the medallion above, but to be honest, I was only really recognized for having one of the 10 best appraisal blogs on the Internet.  Feedstock collects them in one place, and some of their highest rated blogs I also recognize and should commend.

The vast majority of appraisal blogs I see are oriented to residential appraisers in the USA, and I generally ignore them for just reporting old news or whining about how life is unfair for residential appraisers who haven’t evolved beyond the URAR form or learned how to “support their adjustments”.

Here are the top 3 blogs I respect and honor:

Appraisal Today by Ann O’Rourke.  It presents a lot of useful information, and some of it is even oriented towards commercial appraisers like me. She is a highly seasoned appraiser and MAI.

WorkingRE, created by David Brauner, was the inspiration for my own blog, which I started 15 years ago. Even though WorkingRE is exclusively oriented towards residential appraisers, he advised me that creating a good blog would be good for increasing one’s own appraisal business.  In these last 15 years and 176 posts I have now gained worked on 6 continents. I also found my Errors and Omissions Insurance through them. I don't know what happened to David Brauner, but the new publisher is Isaac Peck who has seamlessly continued the good work of this blog.

Miller Samuel is oriented towards the New York City Metropolitan Area but provides comprehensive residential statistics for those needing such information.  I see them quoted in the press more often than any other appraisal blog. I've never met Jonathan Miller, but he sure knows how to blog.

For the full list of blogs, go to https://bloggers.feedspot.com/real_estate_appraiser_blogs/

Reposting my post from 2013 on "Critical Thinking for Appraisers"

Some things don't change, and I find this old post of mine to still be relevant:

My posts on Scotland and Trinidad last month were critical of "chartered surveyors" who allowed false information to enter the valuation process with exculpatory phrases such as “the developer informs us that…” without verifying such information, even if it seemed preposterous. I did not intend to suggest that chartered surveyors were worse than valuers and appraisers elsewhere.  The same problem exists  throughout the world, including my home country of the USA.

Part of the problem is that “critical thinking” skills are not part of the valuer’s training in any nation where I have interacted with local valuers. 

In the English-speaking world, valuers are trained using “business school” methods.  Instructions in problem-solving start with set, unchallenged assumptions, and the question is not asked, “What if the information and assumptions are wrong?” or "What if the property owner is lying?" There is an intermediate step which is being neglected, the step that consists of verification, exemplified by such questions as "How do we know that the building measures 25,000 square feet?" Did we measure it? Did a government entity measure it?  Did we get the number off the rent roll? (Rentable areas are often inflated by landlords, as was first confessed to me by regional mall managers in my early years as an appraiser, with big "Aren't I clever" smiles on their faces.) Or were we just "informed" by the owner?

Consider, for instance, that the larger the property, the less likely it is that the appraiser will measure it.  In a recent appraisal of a vacant 44-structure industrial campus, the owner represented building area as 256,000 square feet, claiming the measurements to be from the county tax assessor's office. The assessor's measurements were 54% smaller.

In Latin America and some other nations, valuers enter the profession through the field of architecture or engineering, and their more scientific education is even more dependent upon problem-solving that starts with set, unchallenged assumptions. I find many of these architects and engineers overly rely on the Cost Approach and but lack skill in discerning current market conditions (which need to be known in adjusting the Cost Approach for “external obsolescence”, the loss in value due to unfavorable market conditions or external adverse influences).

Imagine if all appraisers and valuers verified the information about the subject property that they relied on.  The world would receive more accurate valuations.  Instead, trainers of valuers indoctrinate their students into providing multiple “Assumptions and Limiting Conditions” that merely serve as disclaimers that complete due diligence was not performed, and then they have the nerve to call this "good appraising"! Remember that "Assumptions and Limiting Conditions" serve to protect appraisers and valuers from liability and not to protect the client.  Take the following example:

In the Scotland post, (http://www.internationalappraiser.com/2013/09/appraisal-of-former-naval-base-in.html), I spoke of a former munitions site appraised as the site of a new, 5-star hotel, with the valuer stating the assumption that no environmental contamination was present (almost never the case with a munitions site), even with abundant metal scrap visibly leaching oxides into the soil, underneath signs warning persons to keep out due to ongoing asbestos removal. The soils at munitions sites need to be scrubbed of toluenes (the most notable of which is Tri-Nitro-Toluene, or TNT). These are toxic and explosive compounds. So if they scrubbed the soil, like they say they did, why did they place the decades-old debris back in place?

Making this assumption in the “Assumptions and Limiting Conditions” section of an appraisal is not good appraising; it is aiding and abetting fraud. Sure, a valuer is not professionally trained in measuring environmental contamination, but a valuer does not have to be an environmental expert to state visible evidence in his or her report.

Once I had a debate with another appraiser on an on-line appraisers' forum.  I mentioned that I had one client who insisted that I inspect the roof on every building that I appraised for them.  This other appraiser seemed angered by my remarks and insisted that roof inspections were outside the scope of an appraiser’s duties and it was dangerous to our profession to think otherwise. He even stated that it was even unethical to state my roof observations because it would infer that I was representing myself as a roofing expert. That had been what he was taught.

I remember a situation with a former Honeywell building in Minnesota in which missing or worn-out roof flashings resulted in rain and snow melt leaking down inside the exterior walls and destroying several hundred thousand dollars of computer equipment. Now which appraiser is more likely to get sued – the one who pointed out the obvious hazard, or the one who performed an incomplete property inspection and had the attitude of “That’s not my job”?

The truly concerned appraiser or valuer (who cares about his clients) needs to think about whatever may affect the market value of the property.  This includes being properly informed in matters of construction and design, environmental hazards, flood zones and protected wetlands, demographic analysis, and microeconomic analysis of the equilibrium between supply and demand.  Anything less could make the valuation a meaningless academic exercise and is an abdication of professional responsibility.  It can also hurt the client.

But let us take "critical thinking" to an even higher level.  Shouldn't we as appraisers and valuers also question valuation techniques that may be improperly taught and used? 

The appraisal profession has sometimes been deficient in its use of discounted cash flow (DCF) analysis, for instance. Some appraisers and appraisal organizations teach that future expenses will grow no faster than future income, when in reality, a building is a deteriorating asset and expenses will almost always increase faster than the rate of price inflation. So many commercial loans have failed because reliance was placed on an unrealistic DCF analysis.

Appraisers have also been surprisingly resistant to the concept of looking at listings as comparable sales data. If listings are found indicating lower market values than most recent sales, this is the warning indicator to inform appraisers of a declining market. In that case, listings will indicate the new, reduced ceiling of value.

Some appraisers refuse to use comparable sales that are foreclosures or in foreclosure, even if the appraised property is also in foreclosure. Someone has taught them to do this. This can result in overvaluation.

Critical thinking can sometimes fly in the face of professional orthodoxy, which may not always hold up to logic. There has been a status quo maintained by professional "Grand Poobahs" whose power is dependent upon a lack of change.  

PS:  For younger or foreign readers, the above illustration is of a television character named "Sergeant Schultz", an incompetent prison guard played by John Banner in the 1960s television sitcom "Hogan's Heroes". His stock phrase was "I know nothing, NOTHING!" 

A Word about some of my competitors

/>

It should be no secret that many of my international appraisal assignments come from on-line search engines. While I still get top of front page results on Bing and Yahoo and Yandex (Russian search engine), I’ve slid down to the 4^th page on Google, where I am dismayed to find myself ranked below ads placed by trolls – unnamed middlemen who create fanciful web sites with no information about who works there, who’s in charge, and what is their experience? These trolls then call me and other real international appraisers to get us to bid on serving the suckers who got attracted to their fake sites. Trolls. Middlemen.

When they advertise a physical address more questions arise because they may not even be located near an international airport.  (At least I live 19 miles from Los Angeles International Airport). One such website brags about its appraisals being done by designated members of The Appraisal Foundation, which does not designate any appraisers; it writes the Uniform Standards of Professional Appraisal Practice (USPAP), as well as designations from the Royal Institute [sic] of Chartered Surveyors, when they are really pretending to belong to the Royal Institution of Chartered Surveyors.

They may have fanciful names such as “Mega World Appraisal Valuation”, but disclose nothing about their staff, their leadership, and their assignments.  Do not be fooled. Call a real appraisal firm and find out who will be doing your international assignment. If you call The International Appraiser, I promise that I will personally appraise and inspect your properties based on 41 years of appraisal experience.  I have no other staff and don’t farm out work to contractors, but I do confer with and sometimes hire appraisers in other countries. I write the reports, though, and make the final value conclusion.

How Wildfires Reduce the Value of Land

The denuded hillsides have created flash floods and rock slides

 Living in California for the last 37 years, I have witnessed several wildfires and sometimes find myself traveling to affected areas.  Los Angeles County experienced unprecedented wildfires last month (January 2025), and I was able to see the Eaton fire from my home in Los Angeles, just as I remember watching the same area burn back in the mid-1990s.

The Los Angeles County Assessor is working on assessed value reductions for as many as 19,000 properties.  These “decline-in-value assessments” will be automatic, but interestingly enough, the Assessor said that these declines in value will only apply to the “Improved Values” of the affected properties, not the land values.

This presumes that land cannot burn down or be devalued by a fire because land is so permanent.

In many cases, in flat urban neighborhoods of California, if a house burns down it can be redeveloped with a more valuable one as well as two accessory dwelling units (now permitted by California state laws superseding local zoning), so it seems logical that such land would not usually go down in value.

On the other hand, in the hilly areas in the suburbs and mountains, fire can seriously reduce the value of the land, even when it is vacant.

The typical value-reducing problems include:

·       Flash flooding from denuded slopes. Live trees take up rainwater through their roots, whereas dead roots result in rain runoff continuing downhill, sometimes escalating to destructive speeds.

·       Pollution from the flash flooding, not only on the subject property, but the properties below.

·       Toxic runoff can also potentially poison wells in the area.

·       Rockslides can be particularly dangerous as storm runoff loosens the soil.

·       Particularly hot fires can actually burn all the organic matter in the soil.  This could delay the soil’s recovery for up to 20 years.

Here are some photographic examples from my work:

The home itself was built in a large clearing in the forest, but more than 90% of the trees in the surrounding 5400 acres were destroyed, and there are many dead trees upslope from the home. Also read my blog post: The Peculiarities of Appraising and Investing in Log Homes .

Behind the home you can see two years worth of rock slides plus a stone retaining wall to deflect sheet flooding from the denuded hillside above.

The creek downhill from the home is now clogged with debris from several flash floods.

The well should be tested for pollutants after several flash floods.

The ranch was originally listed for sale for $16 million before the fire, with the price reduced to $8 million afterwards.

For more information, go to my upcoming blog at www.FireAppraiser.com .

10 Mistakes that Other International Appraisers Make

 

1.     1.  No boots on the ground.

T    The above photo was taken from Isla de Mujeres, Mexico.  It might look like a fertile agricultural field from several feet above, but it was actually a mangrove swamp, as can be seen in the photo below.  One rule I insist on when I inspect is that I must actually set foot on the property, but I always tell my hosts that my client requires this so that I don't seem like a jerk. 

Sometimes an appraiser is taken on a helicopter ride for the same reason.  A property in Fiji I toured by helicopter was also a mangrove swamp, but I stayed at the nearby Sheraton Denarau Resort and took a short walk later to discover that the fertile-looking field was also a mangrove swamp. I also remember appraising beachfront property in the Dominican Republic and inspecting it on foot, discovering it to be part mangrove, while a competing appraiser was taken on a helicopter ride and steered to the wrong property to declare it to be completely solid land ready for residential construction. She may have been wearing heels.

In two cases in Mexico, the developers took me to an offsite high point to view the property, including the situation above, in which they originally took me to a tower.   In another case, in Acapulco, they pointed at the property from a main road, and I commented that the site looked landlocked.  When forced to drive me to the actual site, people came out from the nearby jungle to advocate that they were ejidatarios (campesinos who had already taken legal possession of a vacant site) who now actually owned the site.  This happens often in Latin America when vacant land becomes occupied by squatters.  The law often favors the rights of squatters over absentee gringo landlords. Who is right and who is wrong? 

2.   Getting steered to the wrong property.

Make sure you study the maps beforehand.  Sometimes a developer trying to finance a Phase 2 will show an appraiser the completed Phase 1 instead.  Caveat: If you are being shown Phase 2, be sure to see Phase 1 too.  In a couple of occasions I found that a Phase 1 was not actually built.

3.  Getting the measurements wrong.

Always check with the local municipal jurisdiction, not the fanciful maps or declarations of the loan applicant. Most foreign jurisdictions now have official ownership maps on the Internet.

4.    Getting the ownership rights wrong.

There should always be a deed or escritura.  If the owner or his/her representative is not present at the inspection, contact should still be made. In one situation in Mexico, the buyers simply presented a "power of attorney" signed by the owner in the 20th century.

5. Verifying that all development entitlements are in place.

When in foreign lands, this might entail extensive use of Google Translate on the development regulations specified on-line.  Be careful in Costa Rica!

6.  Not verifying broker-supplied information.

This applies in any appraisal assignment.  Examples: A broker selling a rural hotel site claimed there were 32 fishing tournaments per year across from the hotel.  Not true. The closest tournament was several miles away on an island in which the fishermen simply brought their RVs (recreational vehicles) to stay in.

7. Footwear.

In many cases you will need boots.  You might be criticized when saying "I can't walk on that!" Then someone might say that you refused to see the best part.

8. Not meeting and verifying the owner.

This is similar to proviso #4 above. At the worst you may be enabling an illegal sale; you may also discover that the owner and buyer are related parties.  Besides, if the owner knows the most about the property, shouldn't you talk to him or her?

9.   Not consulting Google Earth.

We have been warned about crooked realtors, crooked property owners, crooked inspectors, crooked appraisers, etc., but who suspects the land surveyor?

His measurements were:

Cliff top (highlands) 446,328 square meters 

                                                                Cliff face                  257,242 square meters 

                                                                Beachfront               426,430 square meters 

To                                                           Total          1,130,000 square meters (113 hectares)

     The above is the site map for a beachfront hotel.  Now let us look at the Google Earth map.

While the surveyor measured beachfront area as 42 64 hectares (about 94 acres), Google Earth measured all land at less than 50 feet in altitude as 34.45 acres, and the mountains are considerably closer to the water than in the survey map.  What is even odder is that 25.72 hectares were assigned to cliff face area, which is horizontal. I have never seen this done by a surveyor before.

      10. Failure to use language translation applications.  Google Translate is what I use, but I understand that Bing also offers such.  Google Translate is not 100% perfect, but it has been solid for me in translating Spanish, and I have also used it for Portuguese, French, German, Korean and Chinese. The Asian languages are more difficult to translate. Years ago I found GT through an unlikely source, a mortgage broker who couldn't speak Spanish but was insistent about dating Colombian women.  He had a computer terminal at home which was constantly set at Google Translate. He was a happy man.

      11. 

5

10