Working for national firm vs. yourself

[DJayG]

You are 100% IMHO. I was able to generate similar amount over 25 yrs with slightly different mix (commercial, city/state contracts/1-8 plexs).

I haven't thought too deep about going on my own, but it's good to know you can do well if you get set it up right and have good clients.

 

[PL1957]

I haven't thought too deep about going on my own, but it's good to know you can do well if you get set it up right and have good clients.

IMO, the biggest drawback to the 4 x $2,500 sole practitioner scenario is that you will never be able to smooth your workflow. It’s inevitable that you’ll either have all 4 due at the same time or nothing due for three weeks. With delays in being engaged, delays in information, delays in setting inspections, even the most tightly choreographed assignments rarely come off without some burp in timeline. It turns in to feast or famine, both of which are equally stressful.

 

[Alamo Cowboy]

IMO, the biggest drawback to the 4 x $2,500 sole practitioner scenario is that you will never be able to smooth your workflow. It’s inevitable that you’ll either have all 4 due at the same time or nothing due for three weeks. With delays in being engaged, delays in information, delays in setting inspections, even the most tightly choreographed assignments rarely come off without some burp in timeline. It turns in to feast or famine, both of which are equally stressful.

For me the volume was consistent. Sometimes commercial was hot, sometimes I merely relied on my state/city contracts, sometimes it was the 1-8 property, sometimes it was my niche work (equestrian ranches, nudist colonies, churches, probate, etc.). I liked doing the different types of appraisal work. I could always say no to an assignment and my client would offer me another bid/contract. For most of my work turn-time was not a factor (quality and communication was most important). I was never dependent upon 3 or 4 clients for work.

I need to state that I never worked for a regional or national company. I was a sole practitioner for my entire appraisal career.

 

[Deleted member 126639]

IMO, the biggest drawback to the 4 x $2,500 sole practitioner scenario is that you will never be able to smooth your workflow. It’s inevitable that you’ll either have all 4 due at the same time or nothing due for three weeks. With delays in being engaged, delays in information, delays in setting inspections, even the most tightly choreographed assignments rarely come off without some burp in timeline. It turns in to feast or famine, both of which are equally stressful.

I've appraiser $1Billion 50+ tenant office buildings overnight.

I never said you should rely solely on that scenario. The scenario allows you to diversify into other business lines.

The issue is simple, despite protests to the contrary: nearly everyone in the commercial real estate industry thinks appraisers are morons who do little more than plug in whatever numbers are needed to hit their value. And they like that arrangement.

But unless you have actually been doing due diligence and not being a Costar monkey, i.e. maintaining broker relationships, lender relationships, developer relations, investors relationships, you'll be out of luck when you're ultimately forced out of your national firm job. Why would they keep anyone on past 40? If relationships don't matter, if supply and demand concepts and forecasting doesn't matter, you can get a kid out of college billing $400,000+ in 2 years.

In a more sane time, it took years to build these relationships and were invaluable. It still does take years, but they aren't valuable to most appraisal clients. And they aren't valuable to slave driving bosses who pull in 7 figures for brazenly encouraging flagrant unethical professional practice.

 

[cejack]

Ph.D. from Wharton disagrees with a spike in terminal cap rates at end of holding period. See video below from Walker / Dunlop. Obviously, history has shown that 0-50 bp premiums above going-in have been wrong in most property types and markets with general observed significant decline in cap rates for most commercial property types in most metro markets over the last 10 years. See following Walker and Dunlop interview with Dr. Linneman.

Go to about 39:45 in the video and listen. Or listen even a few minutes before that and see what you think. Pretty bold prediction of 10-15% lower cap rates in 7 years from where they are now due to "QE Infinity". I guess this also assumes that the fed still maintains their control of the interest rate market - which is a whole different discussion.

Of course, no one knows the future for sure. I think your best bet is to figure out what people using DCF to price their properties are actually using for terminal cap rate premiums as that will dictate what is actually paid and translate into value. Now if you want to talk about the prudence of considering a minimal terminal cap rate premium or not considering the risk of a massive spike in terminal cap rates, that's a whole different discussion about the risk of investing in that asset. Obviously, one should consider that in their risk mitigation and prepare for how the buyer will handle that situation if it transpires.

-CJ4

 

[Deleted member 126639]

Ph.D. from Wharton disagrees with a spike in terminal cap rates at end of holding period. See video below from Walker / Dunlop. Obviously, history has shown that 0-50 bp premiums above going-in have been wrong in most property types and markets with general observed significant decline in cap rates for most commercial property types in most metro markets over the last 10 years. See following Walker and Dunlop interview with Dr. Linneman.

Go to about 39:45 in the video and listen. Or listen even a few minutes before that and see what you think. Pretty bold prediction of 10-15% lower cap rates in 7 years from where they are now due to "QE Infinity". I guess this also assumes that the fed still maintains their control of the interest rate market - which is a whole different discussion.

Of course, no one knows the future for sure. I think your best bet is to figure out what people using DCF to price their properties are actually using for terminal cap rate premiums as that will dictate what is actually paid and translate into value. Now if you want to talk about the prudence of considering a minimal terminal cap rate premium or not considering the risk of a massive spike in terminal cap rates, that's a whole different discussion about the risk of investing in that asset. Obviously, one should consider that in their risk mitigation and prepare for how the buyer will handle that situation if it transpires.

-CJ4

Yeah, and the Wharton PhD probably cannot explain to you what IMF special drawings are, what Keynes proposed as the Bancor at the United Nations Monetary and Financial conference, or why every country on earth hates using the USD for foreign exchange and why that impacts interest rates. Paul Volker himself doesn't even believe this, and he is the man that jacked interest rates up to 18% on 10-year notes and allowed this incompetence to pervade real estate economics for 40 years. Why did he raise interest rates at that time?

Even Janet Yellen is calling for a New Bretton Woods System.

Janet Yellen says this week's IMF and World Bank meetings will be a 'Bretton Woods' moment

It's time for a new post-COVID monetary world order, she said Monday.

fortune.com

If the people who make the policy don't believe in an "interest rate market", why should you trust this idiot? What a waste of my time. Thankfully the crew at Walker and Dunlop are too stupid to properly implement Apprise!

There will be world war before cap rates go down for another 7 years.

All that said, if you are doing small balance appraisal, of course - such investors are not even aware that money and interest rates are political constructs. The higher the dollar amount, the less this is true. It is not a coincidence this man chose 7 years, as no one at any REIT or fiduciary is running anything more than a 7-year DCF as the uncertainty is simply too great. Many are running 5-year cash flows.

It isn't that no one can predict the future, it is that the future will be determined by political action, up to an including world war. When the political leaders of the world are calling for banning the use of national currencies for foreign exchange once again and adopting a UN mediated reserve currency unit of account, it's pretty hard to justify running a 10-year cash flow.

It depends what you want to do in this business. You can irrationally analyze historical trends without any regard to the future (a clear USPAP violation as indicated in Appraisal Institute Guide Note 12), or you can find clients who actually want real analyses and advice. There is a difference between investment value and market value, but when the Secretary of the Treasury is stating something vastly different than the clown in this video, you have a responsibility to at minimum comment that the market is irrational for reasons X, Y, and Z and the durability of your value conclusion over the typical holding period (and you should be stating that it's 5-7 years) is dependent upon political actions that cannot be predicted.

 

[Deleted member 126639]

Ph.D. from Wharton disagrees with a spike in terminal cap rates at end of holding period. See video below from Walker / Dunlop. Obviously, history has shown that 0-50 bp premiums above going-in have been wrong in most property types and markets with general observed significant decline in cap rates for most commercial property types in most metro markets over the last 10 years. See following Walker and Dunlop interview with Dr. Linneman.

Go to about 39:45 in the video and listen. Or listen even a few minutes before that and see what you think. Pretty bold prediction of 10-15% lower cap rates in 7 years from where they are now due to "QE Infinity". I guess this also assumes that the fed still maintains their control of the interest rate market - which is a whole different discussion.

Of course, no one knows the future for sure. I think your best bet is to figure out what people using DCF to price their properties are actually using for terminal cap rate premiums as that will dictate what is actually paid and translate into value. Now if you want to talk about the prudence of considering a minimal terminal cap rate premium or not considering the risk of a massive spike in terminal cap rates, that's a whole different discussion about the risk of investing in that asset. Obviously, one should consider that in their risk mitigation and prepare for how the buyer will handle that situation if it transpires.

-CJ4

And I got to tell you - I appraised the Kyle Canyon development in Las Vegas during the last financial crisis representing the lender in what was then the largest foreclosure in US history.

I just looked it up on a Google Maps, and it doesn't look like even 20% of what was planned was ever completed. I'll never forget the local who prepared the original appraisal for the bank. It was by far the longest appraisal report I ever read, to this day. Hundreds of pages of meaningless retrospective data and literally no commentary on what could possibly drive demand for something like 25,000 houses, several thousand apartments, and all the other supporting retail, golf courses, etc.

You have but to visit that site and see for yourself the consequences of failing to implement a proper Level C or D market analysis.

 

[cejack]

Janet Yellen says this week's IMF and World Bank meetings will be a 'Bretton Woods' moment

It's time for a new post-COVID monetary world order, she said Monday.

fortune.com

If the people who make the policy don't believe in an "interest rate market", why should you trust this idiot? What a waste of my time. Thankfully the crew at Walker and Dunlop are too stupid to properly implement Apprise!

There will be world war before cap rates go down for another 7 years.

All that said, if you are doing small balance appraisal, of course - such investors are not even aware that money and interest rates are political constructs. The higher the dollar amount, the less this is true. It is not a coincidence this man chose 7 years, as no one at any REIT or fiduciary is running anything more than a 7-year DCF as the uncertainty is simply too great. Many are running 5-year cash flows.

It isn't that no one can predict the future, it is that the future will be determined by political action, up to an including world war. When the political leaders of the world are calling for banning the use of national currencies for foreign exchange once again and adopting a UN mediated reserve currency unit of account, it's pretty hard to justify running a 10-year cash flow.

It depends what you want to do in this business. You can irrationally analyze historical trends without any regard to the future (a clear USPAP violation as indicated in Appraisal Institute Guide Note 12), or you can find clients who actually want real analyses and advice. There is a difference between investment value and market value, but when the Secretary of the Treasury is stating something vastly different than the clown in this video, you have a responsibility to at minimum comment that the market is irrational for reasons X, Y, and Z and the durability of your value conclusion over the typical holding period (and you should be stating that it's 5-7 years) is dependent upon political actions that cannot be predicted.

I'll sum this up simply. I don't disagree with your points at all. I thought a lot of what you're saying would have already hit the market after the Great Financial Crisis. But the Fed and the Treasury can make the market dance until it can't someday. That day will be the day of reckoning. When will that happen? I've grown humble enough in my old age to know that I don't know and likely no one else does either. Just as the Bible states that "no one knows the day and the hour" I believe that is the case with the suppression of the market mechanism of interest rates by the Fed coordinating with the U.S. Treasury. No one knows when it will stop. But it will stop. (Queue quote from Herb Stein below.)

Having said that, if actual investors are using 0-50bps terminal cap rates and buying properties based on that assumption, then that is market value even if it is not prudent. Just like standard tract homes with 1,800 square feet selling for $500,000 in LV may have been "market value" prior to the GFC, so to can such terminal rates truly be representative of "market value" in that market space. Now if you asked me if such pricing was "sustainable" and "reasonable" my answer would have been "No" with reference to items such as the median household income and the affordability of such prices to such households, etc., etc.

Now if you're asking questions about risk or the possibility that that market assumption doesn't pan out and there's a huge risk that the "Market" application of terminal cap rates may be way off - that gets to the whole issue of whether appraisers are required to analyze and report these sorts of things or if it's beyond the scope and request of the report which is typically to determine some form of market value. My discussions with banks on issues like these is "that's an issue for our Chief Credit Officer to address."

-CJ4

 

[Deleted member 126639]

As indicated in Appraisal Institute Guide Note 10, you are required to comment on the durability of your value conclusion. Appraisal Institute Guide Note 12 clearly indicates you are required to consider monetary policy in your analysis, and to perform fundamental market analyses during periods of market instability.

The appraiser in Las Vegas that prepared that $1 billion appraisal report in 2007 no longer practices as the appraiser's license was revoked. If you just do small balance appraisals, then you risk of getting sued is low. But if you want to actually provide value to your clients and comply with USPAP and Appraisal Institute guidelines (and if you're not designated, you really shouldn't even be commenting. The bible? Did you know the word "gospel" specifically referred to debt jubilees exclusively prior to Constantine? Christians believe interest is evil!).

Fed Repo agreements clearly signal rate increases. How many appraisers even know what a fed repo agreement is? I'd say fewer than 50. And surely have an MAI designation.

 

[Michael S]

My only experience was at a national firm, albeit in a smaller market. The average report was a B or so. It was nice to have work almost always available, but it also meant that the guy with the relationship who bid $2,200 per property on a portfolio didn't care that the property in a non-disclosure state with limited data was going to take a lot longer than the one in a major metro area with a dozen comps already in the database. Either way he got his cut of the whole portfolio.