Appraisals Are Causing DamageIt is clear from feedback from a variety of appraisers that there is great debate within the appraisal community as to the veracity of many appraisals and the methodology. It is very clear to me that the methodology is completely wrong and that some appraisers just did whatever they were instructed to do. Just because this is the way appraisers always did it and it proved totally wrong, is every reason to change it.In discussions with friends who run banks and sit on boards of trustees of major pension funds, as well as many of my capital markets colleagues, it is clear that almost nobody believes appraised values any more. They are either too frothy in good times or overly negative in bad times, but rarely correct. For banks they are dangerous. In good times they lead to bad lending decisions, and in current times they lead regulators to require banks to foreclose even when the loan is current on interest and the borrower is a responsible owner. Pension funds revalue assets by appraised value in some cases and that undervalues assets currently. CMBS resolutions of defaults require appraisals and they are frequently wrong and lead to bad outcomes. As proof we know that each side gets its appraiser and the results are usually very different. As a former lender, I know that it is easy to get some appraiser to gin up whatever was needed to justify a loan, even when the value was known to be too high. The whole system and methodology is badly in need of new rules and procedures.Appraisers who responded to my blog admitted that they merely reflect the current thinking of investors- as though there was some universal edict among all investors. How do they explain that some investors got out of the market in 2007, while others got in. Which set of investors were the appraisers reflecting. Why do a 10 year cash flow and projected terminal values and discount rates if at the start you are trying to reflect the current investor thinking. That just proves the projections have to be architected to fit the answer which was pre determined to reflect current market prices. It is all nonsense. That is why MAI stands for made as directed. The appraisers have actually admitted in several responses to my blog and my column in Hotel News Now, that they do make their appraisal fit what the borrowers or lenders demand.It is time that the Appraisal Institute convene a roundtable to include bankers, investors, pension trustees and underwriters to set new methodology so that appraisals do what they should, provide a true, independent valuation with all the potential risks brought to the fore of future events. We had thought after 1990 and the new rules then, that things might change, but they only got worse. It is time for true resetting of the definition of what is an appraisal and how is it to be accomplished to give real ranges of values. I am not trying to eliminate appraisals, just to make them much more accurate and usable so they are not misused as they have been and continue to be.
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