Customized appraisals perpetuate bid-ask gap

One reason that transaction volume has fallen off so much in 2009 is that buyers and sellers in many cases are both armed with appraisals that support their opposing opinions of an asset's value. While appraisals may lend credence to an argument, it's important for investors to differentiate among various types of appraisal values.

Most sellers rely on a fair market value appraisal, which attempts to establish the price a buyer will pay a willing seller for a property in today's market. It differs from liquidation value, in which the seller is motivated to dispose of the asset quickly.

"If it normally takes 10 to 12 months to sell this type of property and you want to sell it in 30 days, that's going to drastically reduce the value," says appraiser Leslie Sellers, owner of Sellers Realty LLC in Clinton, Tenn.

Investors waiting to snap up distressed properties for cents on the dollar seek liquidation pricing, or the price a bank might seek for a property after foreclosure. In another variation, a buyer who requires a specific return can order an appraisal of investor value, which gives the highest price the acquirer can pay and still realize a given return on investment.

Holders of senior or junior debt even wield appraisals as weapons to control the destiny of troubled real estate, says Steve Williams, global advisor for research firm Real Capital Analytics. Investors in the first-loss position may have already been wiped out, he says, leaving the remaining junior lenders to argue whether an asset is worth operating long enough to recoup some or all of their investment.

"If it's at all litigious, they each have their own appraisal," Williams says. "If the senior debt doesn't hang on long enough, then the junior debt at all its various positions becomes nonexistent."

The complicated nature of dealing with multiple parties involved on the seller's side is another reason so few transactions have closed, according to Peter Hauspurg, chairman and CEO of New York-based Eastern Consolidated, a real estate investment services firm.

"It's not just a lender and a borrower anymore," he says. "It's a lender, a borrower and a number of mezzanine lenders. It's very difficult to buy into that kind of situation where nobody controls anything."

More data from increased deal volume would facilitate appraisals and give existing debt holders a better grasp of their stake in the deal. "A gigantic amount of selling pressure has built up," Hauspurg says, "but it still has to work through the negotiations between all the stakeholders."