Newbies: Cap Rates and Yield Rates

[Fred]

Bill,
Focusing on one phrase is the first step in misinterpretation. Some folks call that taking a phrase out of context. I have no doubt that one group of people can interpret "sufficient information" so broadly that a seven million volume encyclopedia would not cover it and other people can interpret "sufficient information' to mean a cocktail napkin with a value conclusion.

"On the flip side, if the intended user of the report is a lay person, you would be required, by USPAP, to write a very detailed explanation"
Bill, but there is a huge leap from Point A sufficient information to Point B USPAP requires a very detailed explanation – and what is missing from in between is a series of direct quotes supporting that logic. There is just no place in USPAP where it says you must write a very detailed explanation for lay persons.

Standards of practice at any time are based on the historical norms of practice. Where in the literature do you find this idea that appraisers are imbued with some special force enabling them to explain the minutiae of technical complexities to lay readers? Where in the literature do find this presented as an obligation? To me, it is another leap of logic to presume that the nine real-life, working appraisers who wrote the first USPAP and the five or six real-life, working appraisers who have made up the board in charge of USPAP since then, and who have the same problems in daily practice as everyone else - ever intended the language to mean extreme and absurd things that no rational appraiser would do in the normal course of competent and ethical practice.

What understanding does a lay user need beyond the value of the property? – As in, the tax assessor is wrong or the tax assessor is right or do not pay more than X. Even a bankier only needs the value to multiply by some number to find the maximum loan amount.
What possible explanation for the income approach would assist a layperson beyond the idea that income-producing properties tend to trade at certain rates of return on investment. Subject property is worth a certain amount because that amount produces this typical return on investment.

A detailed thesis on the differences between sinking fund recapture and annuity recapture is the stuff of academic journals.

 

[Bill_FL]

Steven,

I am not saying that I disagree with you. What I was doing was pointing out the line in USPAP that Austin was referring to.

This is the part of the larger problem. Yes, USPAP can be very vague and it appears that each state enforces it differently. I was simply making the point that USPAP can be construed so as to make the appraiser appear to be required to supply that information to the intended user of the appraisal report.

 

[George Hatch]

Mortgage/equity buildups are cool and all, but they are hardly the best way to determine market value for an income-driven property. For instance, not every (typical) investor can qualify for the same financing. How often are optimal financing terms used when the property itself might not even qualify? Add for variability in the mortgage terms and the whole analysis is weakened. And that doesn't even address how to accurately and reliably support equity returns in relation to the property type, location and condition. The studies and surveys for investment criteria look great on paper and play well to our readers, but how often are those data researched past what a broker says in a listing sheet? I don't know about y'all, but I've found many instances where published and verified data was either skewed or outright misrepresented because of the publisher's bias (the big commercial realty brokerages author most of those surveys).

I don't think it would be out of line for appraisers to present m/e buildups using conservative, moderate, and agressive criteria and demonstrate their respective impact on the value, before choosing one and justifying its use. How many appraisers do that on a regular basis? I regret to say that I haven't in the past, but now (as a result of this discussion) I think I might.

If the subject property type is truly income-driven, then extracting the OARs from the comparable sales data is going to be far more reliable and in any case, easier to support and easier for the readers to understand.
If the comparable sales data does not have such income information readily available, then using a band of investment will serve as a better method than just pulling an OAR out of thin air. However, it isn't really going to make the Income Approach analysis reliable enough to rank it as the primary indicator of value, unless there is a lease and it doesn't represent the market rent. This is not to suggest that the mortgage/equity based buildups have no utility; but except in very limited circumstances, they shouldn't be the primary basis for an appraisal.

Then there is the question of how to communicate capitalization theory to the universe of readers, and if that's even necessary. I know appraisers who do litigation work and suggest that using an OAR is usually too difficult to really define and communicate to a jury; and who favor using net income multipliers as being easier as well as equally reliable. Hence the importance of identifying who your client and readers are and what their needs are. Truth to tell, I think that some of the math-oriented capitalization theories, which came about primarily as a check or to be used in lieu of the extracted OARs from the sales data, has been twisted in modern appraisal practice to imply that appraisers can accurately determine value even when market data from the subject's market segment do not exist. We seem to be trying to impress ourselves and intimidate our readers by implying certainty where none exists. Austin's allegation that many of the buildups are circular in their origin is certainly well founded. I think we can all agree that it gets used that way by at least some of the appraisers most of the time.

Dr. Phil would tell us to "Get Real!"


George Hatch

 

[Austin]

Bill & Steven:
I was told face to face at a state law class by the then chairman of the Virginia Appraisal Board that any appraisal report or method had to be presented with enough clarity that any client could understand it. He also stated that in his opinion regression was not an acceptable method because few understand it, including him.
I hope Tom Hilderbrandt will weigh in on this one because the NCAB has a real tract record of being in outer space on this point. Basically what I recall Tom saying about NCAB and his case was that NCAB said that if they read a report or method presentation and could not understand it, then that was a violation of USPAP. Very convenient if you want to zap somebody. And very self serving.
One of the problems I have when discussing NCAB is they are so far out in left field that when you tell people about it, they think you must be out to lunch for believing any government body could do such crap. Another circular reference.

 

[Fred]

Austin and Bill,
I understand what you mean about regulators and interpretation, I HAVE heard of the Supreme Court. It is not just that USPAP can vary from state-to-state as everyone keeps posting, but it can vary from person-to-person. The standards of practice vary, because practice itself varies.

By way of comparison, suppose you are driving 30 MPH in a 30 zone. The cop gives you a ticket for doing 130. Was there something vague about the speed limit sign, misleading and unclear about they way 30 was written. There is this thing in logic called Pathetic Fallacy and it means when you do not distinguish between the cop having a screw loose or the sign having a screw loose. – as in, it is not the fault of the tool, but the craftsman.

And speaking of loose screws-
"…any appraisal report or method had to be presented with enough clarity than any client could understand it. He also stated that in his opinion regression was not an acceptable method because few understand it, including him"
Would he be enforcing his opinion or what SR 1 calls recognized methods? And what would he be enforcing if adding, subtracting, reading and writing were also not part of his skill set? To me, you are making my point that his "opinion" about report content is one thing and recongized standards are something else.

 

[Austin]

Steven:
Get your 2002 USPAP out and read the comments under SR-1-1a, then come back and tell me what is not an acceptable appraisal method!!!! If you read what that comment says, implies, and or infers, I can use astrological methods to do appraisals but until somebody can show a statistical pattern that I am coming up with the wrong answers, there is not a thing anybody can do about it under these guidelines. They didn't leave the barn door open, they left the back and sides off of the barn in that statement. I can demonstrate and verify my answers mathmatically using my methods, show the variance, and the statistical probability of being correct or wrong. Can you or anybody else do that with so called existing methods. Existing methods do not even have an underlying theory to define what is correct or incorrect so how can you questions anybody else's results? Existing theory doesn't even know where it is going, much less know when it gets there. How can you question something when you don't have a standard of judgment of what is correct or wrong? Talk about circular logic? That is spiral logic.

 

[Fred]

Austin,
I think the comment to 1-1a is an ink blot on the USPAP. I guess that makes it perfect for those who would use USPAP as Rhorshach test.

The rest of Std 1 is do's and don't's - as it should be. Maybe this should go in a Preface (or a shredder).

This stuff about constantly changing is BS. The book of Leviticus has a nice discussion of the present value of an annuity. The Sumerians had compound interest rate tables, expressed in quantities of grain. In his 1811 book Inwood was advocating two-rate yield capitalization because the risk to the income stream the risk to the reversion are inherently different

I think all the mathmatical relationships have always existed in nature waiting to be "discovered." They are only "new" to the person who sees them for the first time. If Newton had been asked to look at the central tendency of sales prices, he would have figured the first four semesters of statistics in two weeks.

 

[Austin]

Steven: There is a theory of knowledge and wisdom that I believe in. It goes like this: “We are born knowing everything. Learning is the process of remembering what we came into the world already knowing.” This explains genius. A genius is a person that has a pipeline to that big database up in the sky. In other words, somewhere in this universe is a repository of all knowledge and wisdom. Thus the statement: “Nothing is new under the Sun.”

You wrote:
“Maybe this should go in a Preface (or a shredder). This stuff about constantly changing is BS.”

Nothing is changing Steven, it is a matter of going deeper into our memory or regressing to higher truth as our minds recall more from that big database up in the sky. That SR 1-1a, is unquestionably the most important statement in USPAP. It gives us the freedom to remember and move forward. What you are suggesting would take us back to the dark ages. If you want to go back to the dark ages, just move to North Carolina, nothing ever changes down there. Read Tom Hilderbrand't latest post on what they are hitting him with next week. It is open season on witch hunting year round down there. Take SR 1-1a out of USPAP and the NCAB could bag their limit in a matter of minutes.

 

[Fred]

SR 1-1a, is unquestionably the most important statement in USPAP. It gives us the freedom to remember and move forward. What you are suggesting would take us back to the dark ages.

Austin,
Just to be clear, you referenced and I responded to the COMMENT to SR 1-1a, which is distinct from the rule itself that says correctly employ recognized methods. Big difference.
I have no idea how you got from my point A to this point B. But it probably assists your debate effort to create a straw man to knock down. I am quite sure we are all opposed to the dark ages.

Show me the manner in which you apply the COMMENT to SR 1-1a to protect Hildebrant. I have only a passing famiarilty with his circumstance, but I do not believe the nature of the complaint is that he is using methods that are too new or too old. The comment seems useless to explain anything because it is misapplying the principle of change to appraisers instead of property. Duh! And how much of Tom's problem has been made worse because he and others have tried to publicly humiliate the board.

I cannot fathom the attempt to evaluate the standards in the context of people who don't, won't or can't understand them. It is like criticizing airplanes because some people don't, won't or can't fly them. Isn't it obvious that fanatical witch hunters are not enlighted by the written word of the scientific community.

So, the SR 1-1a comment is critically important because it keeps us from slipping back into the dark ages? Hmm. How did we ever survive without it?

 

[Austin]

Steven:

“Just to be clear, you referenced and I responded to the COMMENT to SR 1-1a, which is distinct from the rule itself that says correctly employ recognized methods.”

Methods recognized by whom Steven? There is no legally recognized body of real estate appraisal knowledge. Why should I recognize methods than are provably incorrect and recognized by some fantom entity? Read the recent article in the AI’s “Appraisal Journal” on defining market value statistically. Recognized methods can’t even define market value correctly and you expect me to follow their lead? As to Tom Hilderbrandt’s case: The NCAB charged him with deceiving Eve in the Garden of Eden for starters, but if you want more details go over on the other forum on improving the profession and read what the NCAB lawyer is accusing Tom of doing. Tom was using a book by Eton the leading authority in the field on the methods in equestion, and the NCAB said Tom was out of line because one member of the NCAB had 30 years of experience in that field and didn’t do it that way so Tom was guilty. Sheech!!! Wonder how that one will hold up under SR 1-1a?