Real Estate Appraising: Pretty Simple Stuff
To me, one of the most fascinating things about appraising real estate is how terribly simple it is. Yet, there are people in this world who profess that unless an appraiser has a college degree and extensive industry training they can’t possibly know what they’re doing.
Generally speaking, while real estate industry experience is certainly essential to being able to understand the basics of how value is both created and viewed in the market, especially experience with the type of property being valued, to say there’s a need for an advanced education to appraise any type of real estate is nothing more than a self-aggrandizing farce.
Most types of real estate uses are very uncomplicated; this is particularly true of virtually all residential uses and most commercial / industrial uses.
Let’s face it, if you want to get a realistic estimate of what a house is worth, just look around at the most recent sales of similar houses and compare it to the house you’re trying to estimate. In fact, most home buyers and sellers do this “comparison” shopping method every day.
Likewise, if you want to know how much an income producing property (like an apartment building, or an office building, or a shopping mall) is worth, you simply estimate how much net income the property will generate (before paying the mortgage, if any), and either apply a multiplier (e.g. “x” times the net income), or divide it by a rate that satisfies both your desired investment return (the interest rate on the money you’re going to invest), combined with the interest rate on your mortgage. This, too, is done every day by every day people, many of whom have little, if any advanced education.
For an example, when I first started selling real estate back in 1971, one of my very first listings was a building with 11 residential apartments, plus a retail convenience store. Here I was, a high school graduate, with no college education dealing with a 12-unit mixed use income property.
Looking for guidance, I turned to an older man I’ll call, Pete, who became a real estate agent after many years as a builder who, among other things, built and owned several apartment buildings in the same area as my listing. It was Pete who explained the concept and different methods of valuing income property, the concept of cash-on-cash and how to consider the cost of financing.
It should interest you to know, that Pete came from a poor immigrant family. And, because he had to go to work at an early age to help his family survive, he never completed elementary school. Although Pete didn’t have even a basic elementary school education, what he did have was common sense. And, over the years, he acquired an understanding of cash flows and estimating profit which he gained through his experiences as a builder. By the way, in 1970, Pete had a net worth of more than $3 million (which is about $12 million in 2011 dollars).
There are many people just like my old friend, Pete, who buy and sell real estate everyday. And, (sadly) most of these people are generally better able to understand the nuances of value of a given type of property in their market than most so-called real estate appraisal experts.
Moreover, what’s so humorously ironic about all of this (at least to me), is the fact that, according to sound real estate appraisal practice teachings, real estate appraisers are actually supposed to emulate the actions, thought process and methods of those typical buyers and sellers in the same market as the property they’re appraising.
Unfortunately, many in the appraisal industry portray the very basic and easy methods used by people in the market everyday as some kind of mystical or complicated processes and procedures that only they are capable of creating and understanding. Yet, nothing could be further from the truth.
