Suneet Singal on appraisal, price and value

Suneet Singal has a published background in real estate and corporate finance, which is a reason to keep price and value from collapsing into one word. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. They do not state a value for any property. Price is what a buyer pays a seller. Value, in an appraisal, is an opinion under a stated definition, as of a stated date, for a stated use. Cost is what it would take to create a substitute, with adjustments. This entry separates the three, shows a labeled hypothetical in which contract price and appraised value differ, and says what the report should contain. It does not value any asset.

Three words that are not synonyms

Price is a transaction fact when a sale has closed, and it is a proposal before that. An asking price is what a seller hopes to receive. A contract price is what buyer and seller have signed, subject to the contract's conditions. A closed price is what was paid, which you can sometimes see in a deed or a public record and should still confirm. None of those prices is an appraisal. They are evidence an appraiser might consider. They are also numbers a buyer might accept for reasons an appraiser would set aside, including a special need for that exact building.

Value, in this context, is an opinion. Market value has a definition inside the report. The usual elements are a willing buyer and a willing seller, neither under undue compulsion, both reasonably informed, a price in cash or equivalent, and exposure on the market for a reasonable time. If the report instead gives investment value, liquidation value, or going-concern value, it is answering a different question. Investment value can reflect a particular owner's plan. Market value is trying not to. Read the definition before you repeat the number. A precise figure under the wrong definition is the wrong figure.

Cost is the third word. The cost approach estimates the cost to replace or reproduce the improvements, subtracts depreciation, and adds land value. It is one way to indicate value. It is not value by definition, and it is not what you paid. A new building can cost more than buyers will pay for it if rents do not support the cost. An old building can sell for more than its depreciated cost if the income is strong. Use cost as an approach when it helps, especially when sales and income are thin. Do not use a contractor's budget as if it were an appraisal of market value.

What the three approaches are asking

Sales comparison looks at recent sales of similar properties and adjusts for differences the appraiser judges to matter: location, size, condition, lease terms, and the property rights conveyed. The quality of the approach is the quality of the sales and the honesty of the adjustments. A sale you cannot describe is not a comparable yet. An adjustment with no reason is a plug. You do not have to redo the grid to ask which sales were used and what the largest adjustments were.

The income approach converts income into a value indication. Direct capitalization divides one year's net operating income by a capitalization rate. Yield capitalization discounts a series of years and a sale. Both need an income you can tie to leases and expenses, and a rate or a set of rates you can tie to evidence. The capitalization rate entry is the direct-cap piece. An appraisal that shows a value and hides the income and the rate has given you a conclusion without the arithmetic. Ask for both. The Appraisal Institute's textbook is the standard discussion of how those pieces fit.

Reconciliation is the appraiser's weighting of the approaches that were developed. It is not required to be a simple average. An income property may put the most weight on the income approach. A property with many recent sales of similar buildings may put the most weight on comparison. The report should say what it did and why an approach was left out. If you average the approaches yourself and get a different number, you have done a different job. You have not found an error unless the report's own logic does not match its own evidence.

A labeled hypothetical gap

Suppose a hypothetical contract price is $8,000,000 and an appraisal of market value is $7,600,000. The gap is $400,000. That gap does not, by itself, mean the buyer is overpaying or that the appraisal is wrong. It means two figures, built for different purposes, differ by $400,000. The price is what this buyer agreed to pay, subject to the contract. The appraisal is an opinion of market value under the report's definition and scope, as of its effective date. Both can be internally consistent and still disagree.

Loan sizing is where the gap becomes practical. Many lenders have a rule in their own credit policy for whether they use price, appraised value, or the lower of the two when they compute loan-to-value on a purchase. The rule that matters is the one in the commitment you were given, not a rule of thumb you remember. If a lender uses the $7,600,000 appraisal and a hypothetical 60 percent loan-to-value limit, the loan indication is $4,560,000. If the same limit is applied to the $8,000,000 price, the indication is $4,800,000. The difference is $240,000 of proceeds. That arithmetic does not tell you which base the lender will accept. It tells you to read the commitment before you spend the larger number.

A third figure belongs on the same page so it does not get drafted into the argument. A hypothetical assessed value of $6,000,000 is a tax figure. It is not the appraisal, and it is not the price. The property tax entry explains how assessments are used. If someone says the property is "worth" $6,000,000 because that is the assessment, they have changed the question. Correct the question. You can hold three numbers in one note without forcing them to match.

Which rights the report is valuing

Fee simple and leased fee are different property rights. Fee simple is the whole bundle, unencumbered by leases, in the ordinary teaching definition. The leased fee is the landlord's position subject to existing leases. If contract rents are below market, the leased fee can be worth less than the fee simple, because a buyer of the leased fee waits for the leases to end before charging the higher rent. If contract rents are above market, the leased fee can be worth more, with the risk that the rent resets down at expiration. An appraisal that does not say which interest it values is easy to misuse on a rent roll.

A related split is real property versus a going concern. A hotel, a marina, or a business with significant personal property and business value can sell as a package. An appraisal of the real estate alone is not an appraisal of the package, and a price for the package is not a price per square foot you should drop into an office comparable. The report should identify what is included. If the offering memorandum includes furniture, inventories, or a business name, check whether the appraisal included them. Comparing a real-estate-only value with a going-concern price is a category error. It looks like a bargain or a problem when it is a mismatch of contents.

Effective date is part of the rights picture because leases and conditions change. An appraisal dated before a major tenant's notice to vacate is an opinion about a different income. An appraisal dated before a storm, a rezoning, or a sale of the neighboring building can be stale in a way the number will not announce. Read the effective date against the rent roll's as-of date. If they differ, you need a bridge: what changed, and whether anyone updated the opinion. A number without a date is not ready for a credit memo.

What the report should identify

A usable appraisal identifies the client and the other intended users, the intended use, the subject property, the property rights, the definition of value, the effective date, and the scope of work. It states assumptions and hypothetical conditions. It develops the approaches it says are necessary and explains any omission. It reconciles to a value conclusion and includes the appraiser's certification. Those elements are the ordinary contents of a report prepared under the Uniform Standards of Professional Appraisal Practice, which licensed appraisers in the United States are generally required to follow. This page is not a standards checklist and does not replace the report. It tells you what to look for before you quote the conclusion.

Scope is where readers get hurt. An inspection, a desktop assignment, and a review of someone else's appraisal are different amounts of work. A restricted report written for one client may not be a document you are entitled to rely on. Read the reliance language. If you are the buyer and the appraisal was prepared for the lender, do not assume the appraiser owes you the same duty the appraiser owes the bank. You can still learn from the report. You should not describe it as "our appraisal" if it is not.

The income and sales inside the report should be traceable. You want the NOI, the rate, the sales, and the adjustments in enough detail to see whether they match the leases you have since been given. If your diligence changed the income, the appraisal's value indication does not automatically follow. Either the appraiser updates the work or you stop calling the old number the value of the property you now know. An appraisal is not a living number. It is an opinion as of a date, on a scope, with an income that was current then.

Usual mix-ups

People say "the appraisal came in at the price" as if that proved the price was market. It may show that the appraiser concluded a market value near the contract price. It may also show that the assignment was to underwrite a contract the parties had already signed, using information the parties supplied. Read the scope and the comparable set. Agreement between price and value is more comforting when the sales comparison stands on its own and the income was tied to leases, not only to the seller's pro forma. Comfort is not the same as an audit.

People use a cap rate from fee-simple sales on a leased fee with a short remaining term, or the reverse. The rate and the income have to match the rights. A low cap rate taken from a long single-tenant sale will make a multi-tenant building with rollover look more valuable than the sales evidence supports, if you drop that rate onto a different income. Match the pattern. If you cannot tell what rights were sold in the comparable, you cannot yet use its rate. Leave it out rather than average it in.

People also treat a broker's opinion of value as an appraisal. A broker price opinion can be useful market color. It is not an appraisal unless the author is performing an appraisal under the applicable standards and the document says so. Keep the labels. In the hypothetical, you would write "contract price $8,000,000; appraisal of market value $7,600,000; broker opinion, if you have one, labeled as a broker opinion." Three labels keep a meeting from voting on a blended number that no one actually concluded.

What an appraisal cannot prove

An appraisal cannot prove what the property will sell for next year. It is an opinion as of its effective date. Markets move, income changes, and a particular buyer may pay a different price for a particular reason. The exit assumption in a model is your assumption. It is not the appraisal unless an appraiser was engaged to analyze that future date, which is a different assignment. Do not paste today's value into year five and call it an updated appraisal.

An appraisal cannot prove that your investment will meet a target. Market value is not your internal rate of return. You can pay the appraised value and still do poorly if the loan, the capital plan, or the vacancy defeats the income. You can pay more than the appraisal and do well if you had a plan the market-value definition correctly ignored. The report is trying to answer its question. Keep your question separate, and use the report as evidence on the parts that overlap, especially income, sales, and condition.

An appraisal cannot prove a personal net worth or a track record. Nothing in this entry appraises a property owned by Suneet Singal, and the page does not say that an appraiser has valued his holdings. The career record does not contain an appraisal. Use the distinctions here on a report you were actually given. If you do not have the definition of value, the date, and the income, you do not yet have a number you can repeat. You have a rumor of a number.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. The income ratio inside many appraisals is explained in what a capitalization rate measures, and the marketing price you are comparing with the appraisal is in how to read an offering memorandum.