A commercial real estate appraisal is inherently subjective. A study in 1998 estimated that there is only a two out of three chance of valuers getting within 10% of each other in their individual valuation reports (Crosby, Lavers and Murdoch). The nature of an appraisal is to find the truest value of a property. So there can be a strong incentive for appraisers to share their methods and techniques of appraising. This sharing of information can add credibility and weight to report findings. This is why general real estate appraisers who are independent or unaffiliated might partake in a survey of peers. Then, a third party who views the survey can see that a specific valuation method or conclusion is the same position other valuers would take on a similar property type. This is why, North by Northwest recently conducted a survey of peers on appraising gas station fuel canopies.
Reasons to Have A Survey of Peers
But there can be several reasons why a property surveyor would want to undertake a survey of peers. Brokers or buyers might have concerns that poor appraising methods are responsible for inaccurate pricing. This, in turn, might affect pricing in sub-markets such as convenience stores, for example. Sometimes external influences can affect the value of a particular property. Then, having a survey of peers to draw insights from could help maintain a grounding of perspective for appraisers. Similarly, as appraising is intrinsically research heavy, a survey of peers serves as an extra resource for appraisers.
Most importantly, there is always the risk of litigation occurring if stakeholders feel that “incorrect” appraising processes were applied. In this case, a survey of peers can provide strong evidence related to “the use of comparables [which are] reinforced by tribunals and courts (advised by leading proponents of these valuation ‘rules of the game’ acting as expert witnesses).” (Baum, Crosby, Gallimore, McAllister, Gray).
Why is a Survey of Peers Important in the CRE World?
You might ask, why should appraisers do a survey of peers when other professions like medical doctors don’t survey their peers on medical technique? Essentially, because every property is different and equally every appraiser will conclude a slightly different value, however marginal. Similarly, appraisers may not follow expected procedures. They may not apply their data and research by the same methods or put it to the same use. Therefore, by taking a sample of 10-20 appraisers opinions on how to treat an element of appraising you could arrive at a relatively consolidated nature of the property. This should then be adequate to support an appraiser’s conclusion if it was challenged by a stakeholder. Or it could be useful as supportive evidence in a litigation.
But as we’ll see in our follow-up blog post about handling unique appraiser problems, what happens when typical appraisal techniques no longer suffice? And how do we select and define peers to survey? Especially as, with going-concerns and other special-use properties, new issues regularly arise in appraising that neither the appraiser nor their peers have handled before.
Baum, Crosby, Gallimore, McAllister, Gray. (2001) The influence of valuers and valuations on the commercial property investment market. The University of Reading Nottingham Trent University, 10-14.
Crosby, N., Lavers, A. and Murdoch, J., (1998). Property valuation variation and the margin of error in the UK. Journal of Property Research, 15 (4), 305-330.