Even Water Rights Can Dampen Property Values


The appraisal world is changing along with the housing marketplace. Insiders agree, only well-rounded, granular neighborhood-level knowledge combined with global awareness can make a real estate valuation provider powerful.

“One of the most important tasks for servicers and REO managers lies in obtaining granular knowledge on market trends across broad areas,” says Jennifer Creech, CEO of InHouse. “It is not enough to understand Broward or Miami-Dade counties in Florida, for example. It is necessary to understand specific neighborhoods, even specific blocks within those neighborhoods in order to appreciate the value of each asset in the portfolio.”

At the same time, she argues, servicers are realizing that while “highly targeted automated valuation models” can be of great assistance, human intelligence can be even more important. Mortgage banks have to rely on real estate professionals and locally focused appraisers who have the expertise to “help determine accurate values in waters muddied by distressed sales and panic-influenced transactions.”

The result has been a market trend where expertise and data are being used more than ever, “including historic, current and future-view data” that support information obtained from BPOs and AVMs of various types.

Competition between experts and data providers, however, is pushing insiders to strive for excellence. The Appraisal Institute, the nation’s largest professional association of real estate appraisers, is encouraging appraisers “to become geographically competent” so they can provide credible, reliable opinions of value.

Factors affecting the value of real estate properties and the land they occupy vary from proximity to tourist centers to water rights.

One example, according to Sara Stephens, president of the Appraisal Institute, is the valuation of water rights, which is not commonly covered in appraisal texts even though “fresh water is a vital property asset that will continue to grow in importance as the world’s population increases.” In her foreword of “The Appraisal of Water Rights” by Steven J. Herzog, the most recent book in a series of professional educational literature recently published by AIP, Stephens suggests appraisers expand their quest for information even when their focus is on a small, local market.

Location still is the mantra in real estate values, but water, in the form of gorgeous coastlines or vital fresh water supplies, is a determining factor in real estate values. Appraisal assignments involving water rights are quite challenging.

As the world population grows, now passing the 7 billion mark, the global fresh water market will be a “seller’s market” for the foreseeable future, Herzog wrote. He maintains, the nature and transferability of water rights, the applicability of appraisal standards and the skills and knowledge needed to handle valuation assignments involving water rights “represent another set of knowledge appraisers need to embrace.”

In July, the institute published an updated version of “Hotel Market Analysis and Valuation: International Issues and Software Applications” that was initially published in 2001. Authored by Stephen Rushmore, John W. O’Neill and Stephen Rushmore Jr., it focuses on the valuation process and the current state of the lodging industry, supply-and-demand issues, forecasting revenue and expenses, and also covers the history of the hotel industry.

A global perspective is critical when valuing hotels in the five major regions of the world, Stephens said, which is why the book aims to provide an in-depth, up-to-date “and technologically advanced discussion of the market analysis and valuation of hotels around the world.”

In its quest to help appraisers analyze real estate market trends, in June, the institute published a guidance that addressed current issues of concern to appraisers and appraisal management companies.

The guidance stresses how in today’s market analyzing current and anticipated market conditions “is more complicated—and more critical—when a market is rapidly changing, either upward or downward.”

Issues include the extent appraisers are responsible for recognizing changes in market conditions and steps they must take to ensure due diligence in market trends’ analysis. To be adequate the appraisal report “must be completed before highest and best use analysis,” which are critical to a real estate value appraisal assignment.

For years the institute has been a strong advocate of the Uniform Standards of Professional Appraisal Practice, which include the steps appraisers must take to ensure due diligence when analyzing market trends.

Among others, the standards suggest valuation process reconciliation, “especially when market conditions are such that good quality, current data is lacking,” noting that signs of a changing market are symptoms, as opposed to causes.

For example, it is equally difficult to spot a “bubble” market when in the midst of one, as it is to tell when a bust market has started to turn and improve, or when a bubble market has begun to decline. So while appraisers generally analyze historic data, “it is important to recognize that the value of a property is dependent on the future benefits that a property will bring to its owner. Market values are therefore forward-looking.”

In other words, the guidance warns, “Unforeseen events can completely eradicate conclusions that have been based in trend analysis or fundamental market analysis.”

It is the reason why competent appraisers, such as designated members of the Appraisal Institute, continuously interact with buyers, sellers and agents to ascertain, analyze and understand the motivations of market participants.

According to Creech today the job of a real estate valuation professional is much more complicated than it was only a few years ago. Valuation industry changes explain why valuation efforts “are more holistic than ever before." It brings together a mix of information powered by data, by boots on the ground, and by other predictive modeling techniques to present an accurate depiction of asset values for servicers.”