Appraisers' Free Forum

Ok so I am starting to write my demo, anybody with demo writing experience care to pass on some free advice? BTW this is not referendum on the AI, MAI designation or the silliness in having to write a demo.

Brian, if you want any comments from me on the SRA I can help, but not the MAI obviously. Glad you are writing it and not waiting for the upcoming courses as an alternative

All I can do is try and help with comments and suggestions. Go for it Brian and good luck. There will be some punishment in e process, but I believe from what I am told, the end rewards are worth the effort even if you never complete another appraisal after you pass.

I have always heard that most people choose a single tenant industrial building for their property.

Single-tenant, fairly new, in a data-rich market. (Keep down the depreciation you have to support.) Pick the property type with the most sales.

Don't try to show off; you'll only shoot yourself in the foot.

Remember, you have to do this only once, so pick an easy property and do it well. Extract your cap rates from the market; compare and contrast against published sources; and build one as well; reconcile the differences. Extract depreciation from the market (or pick a brand-new property that doesn't have any.) Select a property to minimize (or preferably eliminate) any functional or external depreciation. But if any exists, extract it from the market and support it any other way you can (capitalize a rent penalty, maybe?).

IMO, the key to good demo reports is reconciliation. If you can do something two or three ways, do it. Show the results AND the processes that led you to those conclusions. Then tell which one you're relying on and why.

Biggest problem is HBU. Don't "feel" it, of course. Conclude it from evidence and calculations. Pick a property which has as few feasible uses as you can--ideally, only Industrial, in a zone that allows only warehouses and small manufacturing plants. The fewer the potential uses, the less analysis required. And remember that you may have to complete all three approaches before you can complete the full HBU analysis.

It's a narrative, but use tables to present data; use text to analyze and explain it. Use charts and graphs to summarize data, then explain what they mean and what you conclude from them. Use first person, active voice, and tell the story. If you can write it so that your wife enjoys reading it, you're there.

Don't forget: Every analysis you put into a report should have a conclusion. What does that flat sales graph show the user? How about the one which shows an increasing rent per square foot over the last six months? Is that sustainable in the current market, or is it just a fluke? Why?

Best advice I had on the residential end was to pick your data first. Try to find an area or type of property that has ample data and then pick a subject from there. Don't know if it applies to commercial, but even a cookie cutter house in a cookie cutter subdivision is a bear once you start extracting every single adjustment, and on the residential end, the depreciation end gives the most trouble, so picking a property that is newer is typically better (mine was 55-years old at the time, not the best subject in that end, but had ample data on other ends).

From the standpoint of working on this; try dedicating a couple hours each night just to the demo.

I guess the thing that is freaking me out the most is the market analysis...how detailed do they want me to be? I mean I have a degree in econ and I am starting my masters, I can go way too deep here and I am not sure that is the point.

BTW I already had a single tenant industrial...funny thing huh

Well, are you going to use DCF, or can you do direct cap? If DCF, you'd want to project your market analysis into the future by the length of the holding period and support it as best you can.

Keep the market analysis as simple as you can get away with. What's the present supply? What factors affect it? What does the near term look like? How has the supply grown/shrunk in the past? Why? What drives demand? How much inventory do you have on the books? What's the absorption rate? What are your demand expectations in the near term? Why? What are your conclusions from this analysis? Is the market for investment good/bad/indifferent/slow/soft/etc.? Is the present price/unit sustainable over the holding period? Why?

Who's your client? Does s/he have a sophisticated understanding of the commercial market, or is s/he steeped in the problems of her own profession with a normal level of understanding? You've got to write the report so the client can understand it.

These are random thoughts, shot from the hip. You'll need to be better organized than me.
Hope it helps.

Well they need both DCF and direct cap for the same property. Which one I reconcile is another question. I should clarify the MA point, they need a C or D level analysis. Which means at the best things cannot be anecdotal, I have to derive them....which is not an issue when it comes to absorbtion, or even supply....what gets me in the level and depth of a level C or D analysis. The issue I think lies in their own definition of these levels which is vague at best.

Demo should be written so that it is clearly understandable to anyone who reads it. Although the readers will be MAIs, it should still be very clear, concise and explain everything. Someone wrote that your spouse should enjoy reading it. While I wouldn't quite take it that far, the gist of the suggestion is really on point.

Brian, this should be at masters degree level from my understanding. You should be fine. Don't freak out, and do reach out to Michael L and others who have actually written a demo report on a commercial/industrial property in your area.

Brian,
Do you have the book from AI titled Market Analysis for Valuation Appraisals? That's where the "level C or D" market analysis definitions will be found. (There's a successor to that book which is said to be easier to read, but I've forgotten the title. Search the AI's books for "market analysis" and you should find it.)

Anyway, here's the example outline for a vacant retail center (it doesn't have an example for industrials):
-property productivity analysis
-market area definition
-demand analysis
-competitive supply inventory
-marginal demand estimate
-subject capture estimate
-financial feasibility analysis/threshold testing.

The "level C or D" analyses are differentiated by the level of research. In levels A and B, one can use inferred analysis, in which it is posited that past conditions are predictive of future performance. In levels C and D, fundamental analysis is used. The book cautions that level A and B can be used only in a certain and stable market.

It says that whereas level A and B analyses use historical absorption rates as indicators of future absorption, level C uses "future-oriented forecasting techniques." Future demand and absorption are forecast by first projecting the growth of population, income, and employment. Level C provides detailed submarket data on which to base absorption and NOI projections as well as a competitive ranking of the subject property. "A level C study for an appraisal of vacant land will include a proposed land use plan which specifies the probable property use, or most appropriate mix of uses, and the timing for development."

"Level C analyses make extensive use of primary data, which are compiled by conducting field work and direct surveys. A level C inventory includes all properties that currently exist in the defined market as well as all planned properties."

"...The level C study forecasts specific submarket demand for [properties] similar to the subject property. ... In the example, an oversupply is forecast for Years 5, 6, and 7. These supply and demand data could be used in an appraisal to support future rent and occupancy projections for the subject under the proposed use, the probable timing of the uses of vacant land, and other similar judgments made by the appraiser."

Level D is probably what you'll have to do for your Master's thesis. My advice in general is to keep it as simple as you can. But if something in your study bugs you, go to the level D analysis for that particular aspect. Tear it right down to bare metal, find out about it, and explain it. (The book says that "Original economic base analysis is typical of level D studies." Three years ago, my county paid $50K for one of those.)

Lackey's admonition, "Demo should be written so that it is clearly understandable to anyone who reads it" is a bit much. Taken literally, that would mean you have to write a commercial demo so that the rent-a-cop at the door could understand it.

In the residential demo alternative, the case study specified that the client was unsophisticated in real estate matters, necessitating that you explain things a little better than you would for, say, some investor with a CCIM--but not down to the level of teaching econ and stats to a rent-a-cop. What you *do* write should be easy to read, and not full of appraiserese or econ-student language.