Thursday, February 9, 2017


Want to know if your existing apartment complex is ready for a condo conversion?

As an MAI designated appraiser, many clients have come to me for an analysis as to whether or not their existing apartment complex is ready for immediate condo conversion. 

Recently, there has been a spike in interest from multi-tenant apartment owners and Realtors if the highest and best use of their property is for condo conversion. This interest is mainly due to rapidly rising housing rents, low interest rates and a lack of affordable housing supply for mainly first time millennial buyers.  

In many situations, the apartment owners can possibly have readily available condo buyers by converting their existing rental tenants that currently reside in their buildings. When these renters realize it is cheaper to buy their unit then to continue renting, it becomes a win/win situation for both the landlord and tenant. 

Even if this built-in demand exists for your property, how do you know if condo conversion isn’t your best exit strategy as opposed to just selling the property as an apartment complex? 

The only way to tell if condo conversion is your best option is by conducting two separate appraisals on the property. The first appraisal assumes you will sell the property as it exists as a fully leased apartment complex at stabilized occupancy and at current market rents. This appraisal indicates the property’s current “as is” Market Value. 

The second appraisal assumes you will convert the apartment complex into a condominium complex and sell each condo to individual buyers until all are sold out. This appraisal indicates the property’s current “as is” Bulk Market Value. 

Whichever of these to “as is” values is higher represents the property’s highest and best use. Even if you don’t intent on converting your existing apartment complex into condos, you should always sell your property based on its highest and best use corresponding value. 

If your property’s current “as is” Bulk Market (as a condo conversion) is higher than the property’s “as is” market value (as an apartment complex), sell for the higher value. Don’t leave any money on table! Your buyers are condo converters NOT apartment investors, in this case. 

The problem apartment owners have in selling their property is determining what the highest and best use of their property might be. To hire an MAI appraiser, like myself, would involve two separate appraisals as indicated above. This would cost several thousand dollars and possibly take weeks to complete. 

If you choose to have a professional appraiser prepare both appraisals, you will only receive the reports one time indicating values as of the date of the appraisers inspection. If appraisals indicate condo conversion, you will have to pay the appraiser to update the appraisal as more reliable data becomes available to you as you start the conversion process.  

To appraise the property as a condo conversion, the appraiser or property owner must know the following major components of value. 
  • Cost and time it will take to entitle the property for condo conversion 
  • Individual condo retail selling price points 
  • All cash competitive property yield based on the risk of the project
  • Entrepreneurial profit needed to entitle and sell out the project
  • Costs and expected time it will take to sell all the condos (absorption rate)
  • Temporary rental income and expenses as complex is sold out as condos
As the apartment owner, you might already know many or all answers to these questions. Even if you not sure, a “best guess” will give you a rough idea of your property’s “as is” Bulk Market Value if converted to condos. If this value is significantly higher than your property’s “as is” market value as an apartment complex, you might want to further explore condo conversion as the highest and best use of the property.

Through technology, there is now a way for you to personally solve these problems, fast, inexpensively, without bias or appraiser mistakes, and be able to update the appraisal as more verified data becomes available. You can even keep monitoring the progress of you condo conversion once you commit to proceed.   

This technology was created by certified MAI designated appraisers using generally accepted appraisal processes and financial modeling that would normally cost you thousands if prepared by professional appraisers.  

With this recently developed cloud based technology, there is a way you can obtain by yourself both the initial “as is” value for an apartment complex and the “as is” Bulk Market Value for a proposed condo conversion. 

For more information, press HERE and take a look at a sample appraisal report you can generate yourself for appraising your property as an apartment complex. Or, Press HERE and take a look at a sample appraisal report you can generate yourself for appraising your property as a condo conversion. 

Taking advantage of this new technology gives you an early advantage in this rapidly emerging condo conversion trend. By receiving more information about this new self help procedure, you will be given access to MAI designated appraisers that can answer all your questions. 

Monday, February 6, 2017


Here’s how to successfully break-in using stunning new technology

Just out of college, I was determined to build my wealth in real estate.  It was daunting when faced with the bodies of knowledge I had to master in order to be successful, i.e. investment analysis, appraisal standards, brokerage, financing, risk analysis, construction management, financial feasibility, market studies, etc. 

After getting a real estate license my freshman year of college and selling houses in-between semesters, I started interviewing successful developers and real estate investors of income producing properties and subdivisions. 

The most constructive advice I received from many of my interviews was “you’ve got to make your money on the buy not the sell”. This cryptic sage message wasn’t exactly clear to me and I pressed them for explain more in detail. They told me this advise entails a body of knowledge that only comes with professional training and experience. 

So, my junior year of college, I started working for a local MAI designated appraiser with the intent on gaining the professional training I needed. After two years of appraising single family houses, I was promoted to a commercial appraiser when I graduated from college. Now I had better access and information due to my appraising commercial developments, major remodeling projects, and subdivisions at various stages of development. 

Over the years, I Learned how developers “made money on the buy” by using time consuming financial spreadsheets to lessen their risk of financial loss (this was before computers!). 

After receiving my MAI appraisal designation, I personally began developing and remodeling commercial real estate. I used the secrets I learned in my professional training as well as the secrets I coaxed out of the successful developers in which I had appraised their proposed projects.  

Even when computerized spread sheets became available, the task of “crunching the numbers” before I purchased a property for development or remodeling was tedious, time consuming and mistake prone unless I heavily reviewed my work. 

As an appraiser, I continued my appraisal practice charging clients enormous fees to produce these kinds of investment analysis to early stage developers with proposed projects. Client projects ranged from:

  • Developing income producing properties or subdivisions (including condo projects) from vacant land

  • Remodeling or finishing existing income producing properties or subdivisions (including condo projects)

  • Purchasing existing income producing properties that presently were NOT at stabilized occupancy and/or market rent(s)

  • Purchasing existing income producing properties that were presently at stabilized occupancy and at market rent(s)                            

Now technology has advanced to such a advanced degree that complicated investment financial spreadsheets are available on-line. Software developers have refined the user experience making these once complicated models easy to use and easy to interpret the results. 

All the financial models have been constructed and reviewed to meet generally accepted appraisal standards. I just wish I had access to this technology when I was first starting out in commercial real estate. It would have saved me years of professional training and experience needed to create these models myself. I could have avoided the many financial mistakes I made over the years keeping me from fast tracking my present net worth and financial independence. 

If you’re starting out in commercial real estate or even if your a seasoned pro, take a look at the technology advances that have recently been developed for CRE by pressing HERE.  Not only will this technology save you thousand of dollars in professional fees for in early stage investment valuation and analysis, but will also prevent you from making critical financial mistakes. You will also be able to constantly update your analysis with a single click of your mouse as more reliable data becomes available and economic conditions change. 

This technology will enable you to “make your money on the buy, not the sell” by providing you the initial and on-going game plan for your proposed residential or commercial project or purchase.  

Here’s the best part. Even if you hire a professional appraiser or analyst, they cannot indicate to you if your property’s current market value or proposed finished market value has entered a dangerous bubble. 

No matter what your property’s current market value might be, automated investment analysis and machine learning can now tell you if your property’s current or proposed value is in a bubble. This new value sustainability feature uncovers hidden risks that, until now, have never been available to the general public and unsuspecting buyers. 

Click HERE to see examples of sample reports of automated investment valuations and analysis for various property types at different stages of development. No matter if your a buyer/seller, developer, remodeler, broker, lender or investor, you will eliminate the severe learning curve, expensive initial professional costs, and the excessive time it takes to receive a similar report from a professional.  You will also avoid the hidden risks of real estate bubbles that have never been available before. 

Remember, with proper planning using this new technology, you will be making your money on the “buy” not the “sell” similar in a way the most successful developers plan their proposed developments and commercial property purchases. 

Tuesday, October 4, 2016

Warning To First Time Condo or Single Family Buyers!

Is your SFR & condo’s sale price or market value in a bubble and going to collapse during the current economic cycle?

Millennials currently thinking about buying their first condo or single family house witnessed the collapse of residential values in the mid 2000’s economic cycle.  

Many of you potential buyers are wondering if this is a good time to purchase in our current economic cycle. In many markets, entry level condos and single family housing prices have reached their pre-recession price levels. 

How do you know if you’re purchasing that specific condo or single family in a localized serious bubble as many economist are warning? If this is the case, your purchase price will collapse and possibly leaving you with more mortgage than house value. 

On the flip side, your purchase price might be an awesome buying opportunity with more upside then you or the market realizes. 

You’re the first generation to have access to a free financial modeling technology that solves this important buyer concern. This software was created by experienced licensed credentialed appraisers and financial analysts. 

To use this software, you simply…

  • Answer four basic questions about your possible condo or SFR purchase. 
  • Insert the asking price or market value of your property. 
  • Print out an easy to read report explaining the hidden risks.  

To get your free customized report, press HERE to receive a login and password to this cloud based software. You will also receive a free training video explaining how the software works. 

You’ll be able to make the right buying decision regarding your proposed purchase within 30 minutes once you receive this information. 

Using this information will help you…
  • Realize you’re making an awesome buying decision, or
  • Negotiate a better sale price, or
  • Decide to cancel your purchase and wait for the next cycle to begin. 

If you decide to purchase the property, you can continually monitor the property’s market value indicating the prime time to refinance or sell at the top of the market.  

Your e-mail will remain confidential and will never be given to sales people or spammers.  We sincerely want you to make the best decision BEFORE you buy instead of regretting your purchase AFTER a bubble burst.  

Sign up now! Press HERE and give yourself the peace of mind that you’re making the right investment to one of life's biggest financial decision. 

Sunday, October 2, 2016

Trump: “We Are in a Big Fat Ugly Bubble”

Trump: “We Are in a Big Fat Ugly Bubble”

“There seems to be some perverse human characteristic that likes to make easy things difficult.”  Warren Buffett

In the first presidential debate, Mr. Trump stated, “We Are in a Big Fat Ugly Bubble.” His reasoning is the Fed’s irresponsibly in holding down interest rates that are creating real estate and other asset bubbles. 

Mr. Trump knows real estate bubbles can occur in some property types and locations due to supply and demand imbalances and/or misappropriations of one or more of the following economic balances:

  • The annual all cash risk rate’s (property yield) present value was accurately applied to the anticipated benefits expected by the buyers during their ownership. 
  • The market rent or market rent benefit (if owner occupied) was in the right proportion with the users demographic household annual income for residential properties, and also in the right proportion with the users demographic business annual income for commercial properties.  
  • The property’s market rent expectation increases kept up with actual users expected annual income increases.  
  • No irrational speculative expectation of the property’s future selling price appreciation was factored into the property’s beginning market value sale price. 

What Mr. Trump was referring to was the first bullet point. This economic balance states the property’s all cash risk rate (annual expected property yield) must be in sync with the actual risks being taken. This annual yield includes the expected ending sale price expectation. 

Investors and valuation experts base this all cash risk rate on alternative investments with similar risks. Due to artificially low Fed interest rates, many property’s current market values are being inflated due to lower going-in and going-out capitalization rates that are use to calculate a property’s current market value.  

These cap rates are being lowered leading to higher property values because buyers are leveraging (financing) the sale prices with artificially low interest rate loans. The resulting buyers annual equity yield appears to be competitive with alternative investments with similar risks. 

Without comparing a property’s current market value to its current fundamental value, the market will be unaware the property possibly has entered a dangerous bubble. 

If property values are in an ugly bubble, then Mr. Trump is correct that any interest rate increases by the Fed will have an adverse effect on property values. 

To see if your specific commercial or residential property is in an ugly bubble, there is a simple solution. 
  • First, have your property professionally appraised with an opinion of the property’s current market value. The traditional appraisal process uses comparable sales and data in deriving a property’s current market value. 
  • Second, have the property appraised based on its current fundamental value. This type of analysis uses the above four economic balances to appraise your property. A trusted real estate advisor can easily accomplish this for you using a new software ( You can even use this software yourself with minimal training and cost. 
This software automatically inputs your property’s current market value and compares it to the property’s current fundamental value. If your property’s current market value is significantly above your property’s current fundamental value, your property is in an “ugly” bubble.  

This means you are buying or holding the property at the top of a bubble cycle. The property’s current market value, in all probability, is not sustainable during the current economic wave cycle (approximately a seven year cycle). 

Conversely, you will have a great buying or holding opportunity if your property’s current market value is approximately equal or below its current fundamental value. 

In our bubble infested markets, it is now more important than ever to know your property’s current fundamental value as it relates to its current market value. This type of new analysis advises you when to buy, when to sell, and flushes out hidden risks that until recently were undetectable until the bubble burst.   

Tuesday, September 27, 2016

Warren Buffett’s “Value Investing” Secret Formula is a Solution to Solving Real Estate Bubbles (Part 2)

“Real knowledge is knowing the extent of one’s ignorance”, Confucius

In part 1 of this series, we discussed how Value Investing paradigm for the stock market has created enormous wealth for investors like Warren Buffett. The use of Value Investing made sense in evaluating trades do to the volatility and “corrections” that periodically occur.

Up until around 1970, Value Investing innovative techniques for real estate were not created and were unnecessary because property market values, cost of production, and fundamental values were in sync with each other.  Since then, in many residential and commercial markets, property current market values and their associated costs of production have significantly detached above these properties current fundamental values.

This “Margin of Loss” gap creates a hidden risk that market participants are unaware of until the real estate bubble burst. By that time the financial damage has occurred. This damage does not just impact the property buyer, as in the case of our stock market example, but rather the whole “food chain” that made loans, purchased loans, and bought financial instruments collateralized by these loan. 

The time is right to innovate a Value Investing strategy for real estate. “Margin of Loss” gaps are appearing in unsuspecting real estate types and locations around the country mainly due to: 
  • Globalization and “hot” money flowing into real estate from other countries. 
  • Loose money lending standards and misguided political policies.  
  • Investors taking greater risks in search of higher investment annual yields due to low annual yields of risk free alternative investments.
  • The markets “Irrational Exuberance” and speculation regarding a property’s forecasts.
  • Unsustainable market rents due to unresponsive bank lending for development projects that are needed to keep up with normal supply and demand for certain property types.   
Any one of these “causes” will create a “Margin of Loss” gap between a property’s current market value and its current fundamental value. The reason being is because these “causes” throw off the economic balances that were bullet pointed in Part 1 of this series. 

The trick to protecting yourself in these situations is to know exactly how big this gap might be, if any,  for your specific property using a Value Investing analysis BEFORE you buy or lend. 

So how can Value Investing techniques be used for real estate? You currently can’t buy this information from a valuation expert or trusted advisor. The valuation industry has not adapted  this new technology and continues to only give their opinion of the appraised property’s current market value. As previously indicated, this current market value of a property could have significantly detached from its fundamental value creating a wide “Margin of Loss” gap. 

Valuation experts reflect the market’s expectations by using recent comparable sales and other market metrics. Built in to these comparable sale prices and other market data are the market’s forecasts. If these comparable sale prices are not reversed engineered into the market’s forecasts, valuation experts and their clients will be unaware of any imbalance between the four economic balance bullet points indicated in Part 1 of this series. 

In these volatile changing times, we are still making buying and lending real estate decisions solely based on a property’s current market value opinion derived from comparable sales. In addition, we are not even analyzing the market’s forecasts that make up the property’s current market value opinion. Lastly, by not using Value Investing technology, we cannot see how dangerous the markets forecasts might be until we know the exact “Margin of Loss”, if any, between the property’s current market value and its current fundamental value. 

By continuing to value property in a “Vacuum” is analogous to “rearranging the deck chairs of the Titanic”. No matter how many accurate current market value opinions you receive on any given property, the results will be the same if a large “Margin of Loss” gap is not detected and the property is purchased or used for lending purposes. 

The general market of buyers and lenders cannot be expected to learn and create complex financial models, complicated algorithms and computer coding, and learn generally accepted appraisal standards needed to create a competent Value Investing paradigm technology.     

So a team of valuation experts, coding developers, web designers, and financial mathematicians were assembled to create a Value Investing Software for Real Estate called Valuexpose. This recently launched cloud based product was designed so that even the novice can learn and perform a Value Investing analysis on any property type and in any physical or economic condition.  

We are currently assembling a team of early adapters to train and use this product at no charge.  
Message me and I will send you a login and password to gain access to the software. Also, free training will be provided through a Udemy™ on-line training course specifically designed for the Valuexpose software. We are limiting the early adapters to 100 users that will receive a free lifetime membership at no charge for their feedback. 

The Dodd/Frank financial reform, tighter lending standards, limiting supply, low interest rates, and government guarantees have done nothing to stop bubble formations. As a matter of fact, these “reforms” are actually fueling new and more dangerous bubble formations. These formations are occurring in various property types and in various locations. There are thousand of different types of bubbles forming all over the country. “One bubble size fits all” is a misconception.

Please comment and share this post to keep the conversation going in solving the real estate bubble problem. Become an early adaptor of this new technology that takes investment analysis to the next level and standard of care. 

Warren Buffett’s “Value Investing” Secret Formula is a Solution to Solving Real Estate Bubbles (Part 1)

“Price is what you pay, value is what you get”, Warren Buffett

According to Mr. Buffett, current market value is the “Price” you pay for a property. This price can significantly differ from the same property’s current “Value”. By “Value”, Mr. Buffett is referring to “Fundamental Value”. 

Many years ago, Mr. Buffett understood this economic foundation and created a process of basing his purchasing decisions on a property’s fundamental value called “Value Investing”. You see, Mr. Buffett knew the laws of economic business wave cycles revolved around fundamental values.  

Using this formula mainly for stocks, he successfully purchased an interested stock if the stock’s fundamental value was greater than the market’s asking price (called current market value). The difference between these two values in this buying scenario is called the “Margin of Safety”. 

Mr. Buffett’s formula for arriving at a property’s fundamental value (also called Intrinsic Value) was based on an the company’s fundamental economic expectations in the future. This formula  stripped away any of the market’s “exuberance” speculation and other “irrational” forecasts. Mr. Buffett’s formula also allowed him to input his own risk tolerance to find those stocks with the greatest “margin of safety”. 

This Value Investing paradigm is used by the most successful stock and company investors like Mr. Buffett. The vast majority of investors are picking stocks solely on the prices of what competing stocks are selling for. Even if the an interested stock’s price is below what competing stocks are selling for (comparable sales), the selling price could be significantly above the stocks current fundamental value without the buyers knowledge. Although this stocks selling price appears to be a “bargain”, in reality it is most likely a “suckers” purchase as the value always falls towards its fundamental value over time. 

With “sucker” purchases, the only person that loses when the stock slides towards its fundamental value is the purchaser. What if commercial banks started loaning 75% to 80% of the buyers stock’s purchase price? Ever worse, what if these banks sold these loans into the secondary markets that had government guarantees against loan losses from any cause? What if these secondary markets bundled these loans into financial instruments and had them AAA rated by Moody’s or S & P? Lastly, what if these financial instruments were sold to retail investors and retirement funds?

Without the buyers, banks and rating agency knowing what the stock’s fundamental value was when purchased, this whole “food chain” could be vastly underestimating the risks they are taking. 

Fortunately, this type of “food chain” for stock does not exist and consequently places the risks solely on the stock buyer. If stock advisors don’t factor in the these risks in advising their clients, indirect losses can occur to the advisor if the clients don’t use their services again. 

Traditionally, real estate has been considered a tangible asset made up of land value, construction materials, labor costs, and developers profit. The “rule of thumb” was that the  current replacement costs, less any depreciation, of a finished property was considered to be the property’s fundamental value. 

This “rule of thumb” worked well when real estate values and their cost to produce did not change very much from the years between 1900 and 1970. This was because the balance between a property’s cost to produce and the property’s market value selling price were roughly the same during those years. From 1970 to 2006, the housing price index went from 20 to 180 before crashing back down to 120. Commercial market values followed this same trend over the last 100 years. 

Actually, the property’s market value was not made up of the cost of production but rather the markets forecasts of the benefits they will receive once the property was purchased. It just so happened market value and the cost of production were the same during those years because of these four economic balances that existed. 

  • The annual all cash risk rate’s (property yield) present value was accurately applied to the anticipated benefits expected by the buyers during their ownership. 
  • The market rent or market rent benefit (if owner occupied) was in the right proportion with the users demographic household annual income for residential properties, and also in the right proportion with the users demographic business annual income for commercial properties.  
  • The property’s market rent expectation increases kept up with actual users expected annual income increases.  
  • No irrational speculative expectation of the property’s future selling price appreciation was factored into the property’s beginning market value sale price. 

During this time period, the forces of supply and demand did not significantly impact any of the above four economic balances. Consequently, property market values stayed in close proximity to the property fundamental values. These economic forces kept new development costs of production in check and economically feasible. 

Stay tuned for part 2 in this series that will explain how residential and commercial real estate’s economic forces have gotten out of balance in some property types and in some US markets. The lack of synchronization with rational forecasts of just one of the economic forces can cause a significant detachment between a property’s current market value and its current fundamental value called a real estate bubble. 

In these circumstances, no matter how accurate your property’s current market value might be, even if you can buy the property below this market value, you might be buying a “suckers” purchase without knowing the property’s current fundamental value.    

This series of posts will propose a solution as to how you can economically protect yourself in this volatile real estate market. The answer is a Value Investment paradigm for real estate using advanced technology.  Please comment or share this post to start the process of solving devastating real estate bubbles.   

Sunday, September 11, 2016

Why Aren’t Bankers Embracing New Valuation Financial Modeling that Stops Real Estate Bubbles?

The last real estate housing bubble bust has devastated peoples lives and this country’s economy to the tune of 20 trillion dollars. Economic analysts are telling us bubbles are occurring once again in residential and commercial properties around the country and world. Another real estate valuation collapse could do irreparable harm to this country and its citizens. 

Why in the world do lenders continue burying their heads in the sand by not embracing a new automated valuation technology that immediately stops this carnage if implemented into their lending policies?

This new valuation technology easily alerts bankers and lenders if a specific residential or commercial property has entered a dangerous bubble rendering the property’s current market value unsustainable in the future. Even worse, if these loans are sold into the secondary markets and packaged into bond-like instruments, rated high by Moody’s Ratings or S & P Ratings, and sold to the retirement funds, people and institutions will suffer all along this “food chain” when these bubbles bust. 

Warren Buffet famously said, “Price is what you pay, value is what you get”. For years, stock market analysts have been basing their trades on value investing techniques. The essence of value investing is buying stocks at less than their intrinsic value and staying away from stocks with asking prices significantly above their intrinsic value according to Benjamin Graham. The discount of the market price to the intrinsic value is called the "margin of safety".

Intrinsic value, or sometimes called fundamental value is much harder to estimate for a business entity than for a real estate property. Business entities have many more speculative assumptions the analyst has to make when compared to real estate assumptions. 

Why hasn’t the valuation industry property appraisers embraced value investing analysis in their appraisal reports? Appraisers only report a property’s current single-point-in-time market value to the lenders and their other clients. Valuation experts reporting their opinion of a property’s current market value are reluctant to further opine this opinion of value is not sustainable. Their fear is it will taint the appraisal use for lending or purchasing and that their clients will never use their services again. 

One fellow Appraisal Institute designated MAI appraiser (top designation in the valuation industry) wrote to me:

    “I don’t see our role as appraisers to control anything about the market, nor do I take any responsibility for swings/bubbles in property value if I am doing my job correctly. Do you feel that it is our job to solve this problem?”

My comments to this property appraiser was that our job is not to be misleading to our clients. No matter how accurate an appraiser’s opinion of current market value might be, it can be misleading. If the appraiser knows his market value opinion has significantly detached from the property’s current intrinsic value, there is a certainty the appraiser’s opinion of value is not sustainable. This is because the markets forecast for this property, that makes up the property’s current market value, are unachievable due to the market’s irrational exuberance forecasts.  

So there you have it. Everyone is passing the buck and washing there hands of responsibility and risk to the next person or industry.
  • Sellers, with the help of Realtors, are passing their properties off to buyers whose values are based on “comparable sales”.
  • Appraisers are “doing their job correctly” appraising these properties based on “comparable sales” without a value sustainability analysis.
  • Bankers are basing their loans on the appraised values and selling many of these loans into the secondary markets that have government guarantees.
  • The secondary markets are bundling these loans into bond-liked financial products.
  • Moody’s and S & P agencies are rating these financial products AAA based on the accuracy of the appraised values so they can be sold mainly to retirement funds and other institutional investors.
As indicated earlier, value investing for stock has been used for years. This type of analysis protects the informed investor from buying a stock at a price that significantly exceeds the stock’s intrinsic value potentially jeopardizing the investor’s equity.  

Why hasn’t real estate industry instituted value investing analysis? Investors in the stock market that ignore value investing simply lose their equity when the stock goes down due to excessive risk taking. 

But let’s drill down and see why the real estate industry ignores value investing analysis.

  • Informed sellers know they are selling their property at the top of the market (I don’t blame them).
  • Realtors are making their commissions (I don’t blame them).
  • Valuation experts are making appraisal fees by not “rocking the boat” with a value sustainability analysis.
  • Banks are making their loan fees and selling the loans off into the secondary markets without a value sustainability analysis disclaimer.
  • Moody’s and S & P rating agencies making their fees by giving AAA ratings to loan bundles without a value sustainability analysis.
  • The government is building political capital and economic activity by guaranteeing these financial products without a value sustainability analysis.
  • Investment banks are making commissions by selling these products to institutional investors without a value sustainability analysis disclosure.
You can see why the stock market analysts and stockbrokers use value investing analysis that flushes out a stock price’s value sustainability hidden risks. If their investors loss money, they will not use their services again and possibly will sue for damages. 

On the other hand, the participants in the real estate industry do not take any responsibility for there actions as indicated by the above appraiser’s sentiment “nor do I take any responsibility for swings/bubbles in property value if I am doing my job correctly”.   

What is a reasonable solution to this problem that will actually make all the real estate participants more money then if we do nothing at all?

First, let’s look at the scenario of doing nothing and maintaining the status quo like we are presently doing:

  • Due to the 2006 bubble collapse, appraisers are now heavily regulated and appraisal fees have dropped significantly due to emerging middlemen called Appraisal Management Companies.
  • The banking industry is now heavily regulated and skittish of making portfolio or development loans they intend on keeping. They are mainly loaning to sell the loans into the secondary markets or loaning on properties that qualify for government loan guarantee, i.e. SBA.
  • Current loan demand and development exceeding lenders willingness to loan has created a housing imbalance resulting in unsustainable rental rates and incredible hardships for renters.
  • All of these negative reactions, including the Dodd/Frank financial reform, have not prevented bubbles from occurring again as macro economist are predicting. In fact, these negative responses are contributing to more bubbles formations. 
All of these new regulations and conservative lending policies are stifling economic growth and causing even more dangerous real estate bubble formations. 

By continuing to base lending practices on a property’s current market value without a value sustainability analysis is like rearranging the deck chairs on the Titanic. No matter how much regulation over site we institute in making sure appraisers accurately arrive at a property’s current market value, undetected bubbles will continue to form.

So what’s the answer? 

First, encourage buyers, sellers and Realtors to continue arriving at whatever sales price they think is appropriate for any property. I agree with the above quote from the appraiser saying, “I don’t see our role as appraisers to control anything about the market”. 

Second, do not change how the valuation industry is currently arriving at a property’s current market value. The appraisal process is more than adequate based on generally accepted appraisal standards and regulations that are in place. 

Third, allow the appraisers to offer their clients a value sustainability analysis that quantifies exactly where their opinion of the property’s current market value resides in relation to the property’s current intrinsic value. This new technology is basically a mechanical process that is hard to manipulate. This analysis graphically shows the client where the property’s current market value opinion resides on the economic wave cycle, how far the market value has detached from its equivalent intrinsic value, and which direction the current market value is headed in the future based on the equilibrium line direction.   

Forth, only loans intended to be sold into the secondary markets or guaranteed by the government must have a value sustainability analysis in addition to a licensed appraisal of the property’s current market value. 

Fifth, with value sustainability analyses, rating agencies will have a full disclosure of the hidden risks associated with loan bundles. They will be obligated to take this into consideration when risk rating these financial instruments that are to be sold to institutional investors.  

The benefits of these reforms include:

  • Appraisers can offer a value sustainability analysis as an additional profit center and service without retribution from the client.
  • Lenders can tailor their loan risk analysis on a property-by-property basis instead of loan black balling entire classes of property types. This is a better distribution of capital and keeps lending from drying up across the board. They will also better insulate themselves from lawsuits and loan take backs if full risk disclosure via value sustainability is given the secondary market loan buyers.
  • Realtors will see more stable markets devoid of the lean commission years after a bubble bursts.
  • Rating agencies can also better insulate themselves from government fines due to miss-rating loan bundle financial products.
  • The government will have less risk of having to bail out financial institutions due to catastrophic real estate bubble collapses.
  • The public’s real estate equity and retirement funds will be more secure barring a black swan event that is not remotely anticipated by the market.

Somebody has to step forward with this new standard of care reform and be the person on the white horse. Is it going to be the valuation industry, banking industry, rating agencies, or the government? If these institutions don’t take a leadership position, should buyers of real estate request a value sustainability analysis from their advisers or should they do it themselves?

As a yoga enthusiast, the idea of this ancient practice is to constantly seek balance. Similar to the practice of yoga, intrinsic value and its equivalent ending sale price intrinsic value are what make the equilibrium line that business wave cycle revolve around. 

This equilibrium line is a specific property’s balance going forward into the future. The closer a property’s current market value is to this equilibrium line determines the stability of our economy. The only way to stop bubble is one property at a time. 

With globalization, money laundering, low interest rates, changing government policies and flight of capital from other countries, we are going to experience dangerous real estate bubbles in the future without this new technology. No matter how these events impact a property’s current market value, sustainability analysis will always cut through these disruptive forces by indicating fundamental value balance and future equilibrium direction for each property. READ MORE