A major shift in commercial valuation methodology is quietly underway. More qualitative versus just quantitative. Simply Psychology defines qualitative as data collected through participant observation and interviews and quantitative data as analyzed through numerical comparisons and statistical inferences.
With some exceptions, most commercial appraisals include the quantitative adjustments that you’re used to seeing, 5% adjustment here, 10% there. One general rule of thumb is that the total net adjustments shouldn’t be more than 40% (ish). Otherwise it suggests that the data is not truly comparable. Notwithstanding challenging valuation assignments, readers of appraisal reports expect adjustments to be “reasonable”. Algorithms in residential appraisal data sets mechanically keep the quantitative rules of thumb range in-check. Not so for commercial.
Current trends point to more qualitative judgment than strictly manual numerical adjustments to land, improved and rent comparables with little to no discussion. This change also flows down to other valuation products such as evaluations and reviews. Best practices include less emphasis on a checkbox or form mentality. Rather, focus on competency with reasonable judgment.
There’s an unsaid joke among commercial fee appraisers, “Don’t let market data get in the way of what you think you know it’s worth.” The point being, sometimes the best market data can be inconclusive or less than the ideal supportable conclusions. Appraisers are required to arrive at a single point of value rather than a range. This often necessitates more discussion over and above “typical” numerical adjustments. Reviewers expect more discussion, especially when the raw data leaves them thirsty for more details and valuation thoughts.
“Talking to the reader” in appraisal reports is the new normal. The challenge for fee appraisers is to provide more qualitative discussion despite the pressure of tightening fees and shorter turnaround times. Some appraisers struggle with time management, but trends are rewarding those who invest in productivity, such as an in-house comp database, report writing software and appraisal workflow applications.
Chief credit officers and chief appraisers are the experts when it comes to protecting their institution with sound risk management. These best practices include properly managing your fee panel with professionals that provide knowledgeable insight over and above just quantitative data. If you’re not currently getting it from your favorite appraisers, just ask them. Many appraisers are working hard to re-tool their business and keep their eye on the ball, but might appreciate a phone call. Look for judgment, expertise and local knowledge. The regulators do.