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!"