Valuation Reliability in a Declining Economy
Recently, a few of my clients have discussed with me their general concerns about the reliability of valuation appraisals in our present declining economy. Over the last 38+ years in my career, this is a topic that has popped up its head from time to time in all types of economic conditions. So, I thought it would be a good idea to share with you what I’ve told them.
And, that is, the level, or degree of the reliability of any valuation appraisal in any type of economic condition is always something of an “iffy” matter. This is because there are so many variables that must be considered, regardless of the economic conditions at the time an appraisal is made.
First, there’s the experience and ability of the appraiser; does the appraiser have extensive experience with the type of property being valued?
Second, is the appraiser’s adherence to economic market reality; is the appraiser a “book worm” appraiser (one who relies heavily, or totally on textbook teachings, which tends to provide a valuation opinion that presents a “possible” value), or a “real life” appraiser (one who relies upon a reasonable combination of practical economic theory along with knowledge gained from practical experience, which tends to provide a valuation opinion that presents a “probable” value)?
Third, is to consider the amount, reliability and relevance of the data that is available to an appraiser, and the practical analysis of appraiser’s analyses of those data. An appraiser may pass the first and second “tests” with flying colors. But, if there’s an absence of relevant and/or reliable data from which to form opinions, the appraiser’s opinion(s) will have to rely most heavily upon the experience and the judgement of the appraiser; not necessarily a “bad” thing, in and of itself. However, like any other opinion, it is generally only as reasonable and reliable as the reliability and relevance of the information used in its formulation.
Another very important consideration is, that the people who use appraisals, as always, tend to fall into one of two major categories:
1) those who want a higher number, and
2) those want a lower number.
And, while it’s never the job of an appraiser to appease any position, it is, nonetheless, a fact in the life of every appraiser that many people consider most valuation opinions to be “unreliable,” regardless of economic conditions, even those valuations that are well documented and reasonably analyzed. This is particularly true, if the appraiser’s valuation conclusion substantially differs from the client’s opinion of value (regardless of economic conditions), or from that of the position of another appraiser in an adversarial proceeding.
In the end, after one judiciously applies and evaluates the considerations I’ve outlined above, I believe a “reasonable person” will find that a valuation appraisal in a declining economy, is no more and no less reliable than a valuation appraisal performed in any other economic circumstance.
