In December, North by Northwest conducted a survey of peers in order to bring light to a complex appraisal problem regarding appraising convenience stores. The question was, are fuel canopies real estate or trade fixtures? In this case, the survey of peers helped add credibility to the best methodology for handling these particular properties. But what are the limitations of a survey of peers and when might they become unhelpful?
Two Limitations on a Survey of Peers
We reach limitations when you’re dealing with specialized property types. Or when your pool of peers has shrunk dramatically. In the latter case, an appraiser might have to find the relevant people to answer the questions.
The danger of searching for relevant people to respond to your appraisal problem is that it might skew your survey if you hand pick appraisers because you know they agree with your practice. That’s where professional journals and articles about a topic come into play. For example like the appraisal institute’s appraisal journal. So then you build your case on a survey of the literature of individuals who are recognized as experts.
While the appraisal institute’s articles are reviewed by other appraisers on an editorial board, new methodologies and ideas are often put into the marketplace via a blog or publication. Sometimes these ideas are hashed out in the marketplace and reviewed by other appraisers. If you can convince that peer that what you’re doing makes sense, then it’s appropriate.
An example of the limitations of a survey of peers occurring for specialized properties would, of course, be with convenience stores, which are often appraised incorrectly. If you surveyed a general appraiser who does not specialize in c-stores, he or she may have a very definite opinion about the appropriate methodology. This would be based on other property types on which they had done valuations. These practices do not always translate well to a going-concern property like a convenience store.
A Set of Peers is Relative
Occasionally reviewers of appraisals come back and say “I would prefer to see you include this covered area in the square footage because that’s what your peers do.” But the issue is that your set of peers changes depending on your geographical area. Your expertise and your designation also influence your peer groups. One appraiser’s peers will not be the same set of peers of an appraiser in a neighboring city. This makes things more complicated.
It becomes demography of peers with people of similar experiences. MAI designations tend to flock together and non-MAI’s flock together. But also, people in the same market flock together by tacit or explicit agreement.
So what’s the solution? The idea behind an appraisal is that it reflects the actions of market participation. It anticipates motivations, desires and actions. And the reality is sometimes the contract makes sense to us and sometimes it doesn’t. An appraiser’s job is to figure out why it does or doesn’t.
For example, an appraisal can be ordered by a bank headquartered in another state. Then the reviewer can say “all our reviews include this, you need to include it too.” The appraiser might respond saying, “But my peers and the market participating here don’t.” Now the appraiser and the reviewer are at an impasse because they have two separate sets of peers and it does affect value.
Ultimately, in the disagreement of peers the deciding opinion should be: what does the market do? Not what appraisers do. Appraisers don’t decide the market. They reflect it. And sometimes appraisers get too academic. In that situation a survey of peers might undermine the point of the appraisal.