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The Appraisal Profession at the Cross Roads.

This is an interesting or, depending on your perspective, frightening time for the real estate appraisal and valuation profession. Nearly all the major forces and variables that affect the profession are changing and all at the same time, which is highly unusual. Practitioners face the challenge of positioning themselves to capitalize on the many opportunities, while avoiding the risks that await everywhere. As members of the Appraisal Institute, we have had the opportunity to develop a unique set of skills to aid our transition into the 21 st century.

The purpose of this article is to discuss the forces that will have the greatest impact on the real estate appraisal profession in the months ahead. We have identified the following forces as being among the most significant,

* the increase in public capital through the securitization process to finance private real estate transactions;

* the globalization of business, which will require an international language for valuation with universally accepted definitions and standards;

* technology changes driven by the Internet and the World Wide Web, which, of course, are sweeping through all industries;

* the appearance of new competitors, including real estate data companies, software and networking companies, title companies, financial institutions, and many others.

These forces are changing the structure of appraisal firms, the products and services that appraisers will offer, the regulatory environment, and the educational requirements for the appraisal profession. Qualified professional appraisers will be able to see the opportunities that are available to them as a result of these changes. Change will not enter the profession uniformly and pervasively, but will most likely start with the residential appraisal industry, commercial mortgage-backed securities, and active worldwide international investors. If we watch the trends at the entry points, we will be able to plan for the future.

Where We Are Today?

The U.S. appraisal industry includes more than 85,000 licensed appraisers in what is basically a cottage industry comprised of numerous small independent fee shops, plus a growing number of national and regional companies. While the number of licensed appraisers has remained relatively stable since 1993, the number of appraisers with advanced designations, MAIs and SRAs, has declined. The lower standards fostered by the licensing laws and changes in data availability have resulted in the appraisal becoming a commodity. Appraisers, incorrectly, see no need for advanced designations with the qualifications required to obtain an MAI or SRA. The professional appraisal organizations have failed to provide the education that is required to meet the challenges that appraisal professionals will be confronted within the 21st century.

Changes in firm structure are already becoming apparent. Some national firms, such as Pricewaterhouse-Coopers and Cushman & Wakefield, have been purchasing firms specializing in the valuation of health related properties, research, and other boutique organizations. Several appraisal firms are establishing relationships to form privately held companies, such as Integra. Primis is acquiring residential companies around the country as well as the company, E-appraiser.

The use of automated valuation models is growing. This trend will continue to accelerate as information databases improve. For example, one major national company recently purchased 17,000 single-family loans based on value analysis provided by a computer model. The purchaser used a broker's price opinions on less than 10% of the portfolio to test the model. No appraisal firms were used.

Commercial real estate is becoming an international commodity, with major companies such as Lend Lease owning properties worldwide. Service companies, such as Insignia, are establishing global practices to service the property markets. Some firms offer global valuation services to meet the demands of worldwide corporations involved in mergers and acquisitions.

As we move forward in the 21st century, there will be conflicts between the old, meaning the traditional appraisal firm, and the new, meaning firms such as Microsoft's Home Advisor, and other companies that are developing automated valuation models and specialized real estate services online. Over the next five to ten years there will be a convergence between the old and the new.


The securitization of real property and loans has resulted in a change in the demand for traditional real estate valuation products. Securitization breeds the habit of daily values and reconciliations. This creates a very different valuation environment from the traditional practice of quarterly or annual valuations. Over time, in keeping with the instant-knowledge mentality of stock investors, it will become expected that every change in a lease or in local market conditions that affects a property or asset in a loan portfolio will be quickly fed into a recalculation of value. Although automated valuation models are primitive today, they will develop over time to capture the daily changes that affect the valuation of real estate securities.

The public markets are becoming less willing to pay for real estate appraisers who have the qualifications of an MAI or SRA. They expect that public companies will have the expertise required to properly value their assets and that the rating agencies will provide oversight. REITs, public companies, and institutional investors will buy specialized data chunks rather than full appraisal reports. This information will be available from real estate information providers at a lower cost than from the traditional appraisal company. Only the exceptional or unique valuation engagement will be assigned to outside vendors.

Real property will come to be viewed as a platform for generating additional revenue over and above traditional lease revenue. For example, telecommunications, tenant services, and other affinity packages will be marketed by property owners or managers who understand their captive audience. Therefore, real estate appraisers will need to gain a better understanding of the interrelationship between real property and other sources for revenue that can be generated as a result of the contractual lease for space.

Intangibles, such as brand value and intellectual property value, are becoming increasingly important in real estate valuation. In some cases, their contributions to enterprise value may even exceed the net asset value of the real estate portfolio. While brand value has been important in the hotel industry for many years, it is now appearing more frequently in office and shopping center valuation discussions. Real estate appraisers require a higher level of training to be able to properly value the enterprise. This is true not only for publicly traded entities, but also for small, but well-capitalized and managed private firms.

Finally, appraisers will find themselves valuing a partial interest in a portfolio of loans or a portfolio of properties with less emphasis on the value of an individual property. Over time, it's likely that market valuations of real estate holding companies will substitute for appraisal-based valuations of the underlying property value assets.


While the real estate transaction marketplace is internationalizing rapidly, the regulatory and definitional environment of real estate valuation is still very much characterized by national laws and regulations. This regulatory structure is moving, although quite slowly, toward a global common language, standards and procedures. Since a number of national and regional institutions are involved, it's likely that the process will be complex and cumbersome.

* The U.S. Appraisal Institute may try to encourage other nations to adopt American standards and terminology. Since much of the momentum behind international transactions and property securitization everywhere is coming from Wall Street, standards that are accepted by Wall Street analysts have great credibility.

* The Royal Institute of Chartered Surveyors (RICS), with its nearly 100,000 members, has also recognized the need to move outward from its base of acceptance in the former British Empire and a number of other jurisdictions around the world.

* International investors (like the Dutch funds) are starting to force informal global standards, which may become formalized over time.

The following international organizations are beginning to work toward a common language and an international regulatory framework for real estate Valuation:

* International Valuation Standards Committee: a member agency of the United Nations, based in London, which brings together members of national appraisal societies from 40 nations,

* International Accounting Standards Commission (IASC): recently put forward a new, proposed standard (E64) for determining the fair value of investment property. The proposal calls for one agreed upon method that would replace the current IAS 25, which permits multiple methods for determining fair value,

* International Organization of Securities Commissions: provides for international standards for securities trading and descriptions,

* International Federation of Accountants: strives to develop the profession and harmonize its standards worldwide to enable accountants to provide services of consistently high quality in the public interest,

* TEGOVA, European Group of Valuers of (Fixed) Assets: has created common European standards for valuation, as European common market comes into being (the "Guide Bleu"), and

* Pan Pacific Congress of Appraisers, Valuers, and Real Estate Counsellors: informal association covering the Asia Pacific area.

In this emerging international environment, the question will be increasingly asked, Are the regulations under which US appraisers operate, such as USPAP, appropriate given the changes taking place in the industry and the new competitive environment of the profession? Many of these rules were enacted in 1989 and were intended to protect the public against the abuses and poor practices of the 1980s. These rules should be re-examined to determine whether they now unnecessarily hamstring appraisers and prevent them from competing effectively in the new environment. The marketplace for professional appraisal services now wants different products and different services. USPAP and Appraisal Institute standards may not have been designed with these products and services in mind.

Firm Structure and the Use of Technology

The appraiser of the future will have a wide choice of types of firms in which to work. The new technologies have made it possible to run a profitable business, either globally or locally, from either a very comprehensive firm or a very specialized boutique firm. Not long ago, appraisers were afraid of the inroads made by the international accounting firms into the valuation profession. Many of these fears have not been realized.

In fact, the accounting industry is changing as well, with the major firms reinventing themselves and reconfiguring their service offerings and alliances. The news of recent weeks provides numerous examples: Ernst & Young's spin-off of consulting services to France's Cap Gemini; PricewaterhouseCoopers considering the spin-off of its consulting practice; KPMG announcing its plan to take its consulting practice public and to ally with software giant Cisco.

Multi-function real estate service companies that offer brokerage, analysis, management, and other services will continue to offer appraisal services, or at least to utilize people with appraisal training, as part of their portfolio of services.

Networks of small firms will be a viable alternative as technology advances such as buddy software, web-based groupware, and project management software make collaboration and communication easier and faster. The "application service provider (ASP) revolution," the ability to rent software as needed and download it over the Web rather than pay for the shrink-wrapped packages, will provide another cost-effective solution that helps small firms do online business.

The same technology advances will make it easier for small, free-standing firms to compete by reducing the costs of their infrastructure. Nevertheless, they, like all appraisal professionals, will face more competitive pricing of all services and will intensify pressure on margins.

Some appraisers will continue to be employed in-house by corporate appraisal departments at property owning and investment firms (banks, pension funds, investment bankers). These departments are likely to combine appraisal with research, investment analysis, and other property-related services. However, complex out-sourcing scenarios will become more prevalent. Each of the alternatives described above will form part of a flexible pattern in which major buyers will have some types of work done by in-house staff and will out-source other activities to qualified firms, large and small.

Convergence Brings New Competitors From Every Direction

In the world of convergence, everyone is in everybody else's business. Who will be competing for appraisers' business in the future?

Some of the new industry entrants are obvious, some less. So the obvious, those that have some valuation expertise, include brokers, real estate data companies, title companies, REITs, and financial institutions. Less obvious are general-purpose software and network vendors like Oracle, Microsoft, and Sun. They view real estate and real estate appraisal as just another vertical market.

A few examples will provide a preview of the competitive landscape that is coming into existence:

* RE/Locate: using data from others as part of its multi-purpose portal

* Primis: a real estate information super-market.

* Microsoft's Home Advisor (mortgage information) and General Motors Acceptance Corp (GMAC)

* merged with CoStar and is making numerous recent acquisitions.

* REIPA: a real estate information trade association, which includes many general and specialty firms.

* Gurunet, E-lance, and their ilk: talent brokerages that provide a new model for getting bids on specialized services, online RFPs for appraisal, and other services.

* Push technology firms like BackWeb and Marimba: providing specialized data feeds, as to intranets.

* Acxiom, DataQuick: general-purpose data company with real estate as one of the many vertical markets it serves.

Appraisers once controlled the market information that was used in the valuation of real property interests. With the increased use of technology and large databases of real property information, appraisers no longer have an advantage in providing valuation services. Everyone has access to data, from the individual home owner in suburban America to the corporate decision maker on Wall Street. Furthermore, artificial intelligence software is being used to sort and analyze this data, carrying out more and more of the steps in the valuation process.

Buyers of Appraisal Services

Tomorrow's buyers of appraisal services will include today's buyers, often with different demands, and new buyers with new types of demands and requirements. The large property owning institutions, like pension funds, banks, and insurance companies, will continue to be major buyers. However, they will require faster response from service providers, using online RFPs such as those on, as well as online report and data submissions. There will be more use of preferred providers (short-lists) but also increased use of EBay-rype talent auctions, permitting bids from many providers.

While some buyers may still require traditional quarterly and annual appraisal reports, more and more over time they will buy ongoing service data feeds to run through their in-house models in real time. (For example, every change affecting a leased space feeds into revised estimates of value.) Buyers will be continually trying to balance the use of their in-house resources with those of outside contractors and data providers.

The new world of multiple networked appraisal service providers will result in a vast a la carte menu of products and services. One of the keys to appraiser survival will be the ability to choose and service a profitable niche and to anticipate the length of the useful life of a product or service, before market shifts make it unprofitable.

Here are some of the products and services that an appraiser or appraisal firm might choose to offer:

* Basic (raw) data

* Data analysis

* Expanded data types: audio, video, mapping, 3-D visualization

* Value conclusions

* Inspections: physical due diligence

* Lease and cash flow due diligence

* Specialized information by property type and/or geographic area

* Layered products, via Web hyper-links, where increasing levels of detail are provided in mu1tiple nested products

* Different presentation format products such as the multimedia appraisal for intranets

* Auditing and warranting the validity and reliability of the data trail or data feed

Each of these product types could represent an opportunity for a profitable specialty business. While there will be an expanding list of unique, unbundled, multiple services and products, there will also be a steady downward pressure on pricing them all and a resulting challenge to combine them into profit making packages. The downward price pressure will be complicated by the fact that some firms may give away certain products and services or price them below market to encourage purchase of other services. These subsidies could be offered temporarily, or in some cases permanently. This tactic is becoming increasingly prevalent in accounting firms and multi-function real estate service firms.

The furthest extension of deconstruction of components of an appraisal is so-called micro-pricing, the ability to sell data by the byte. These fine-tuned online offerings are still at the experimental stage, but can be expected to become more common within three to five years. Forms of pricing other than the traditional by-the-report and by-the-byte pricing are likely to emerge. They are similar to those used in other research fields. For example, we will see use of the subscription model--the ability of a buyer to purchase specified amounts of data by the week, month, or other time period. In the case of layered products there will be different prices for each succeeding level of detail.

Employees--Man or Machine?

We can expect software innovation to continue its relentless march, replacing people with intelligent software at all levels of the organization and for many different functions--first clerical and administrative, but eventually at the judgment level as well. One of the important challenges for the profession is to determine what kind of people will be needed in the organization of the future and how they can be most effectively deployed and continually retrained. Of course, as other industries have replaced people with technology, a higher level of expertise was required for the new technologies that were installed. In many cases, employment was not reduced, but the firms became more efficient.

People-replacing technology has already affected the appraisal profession dramatically and will continue to do so with both positive and negative consequences. Viewed in the most positive light, technological change will increase the value-added of the service or product provided by the appraiser and serve as a competitive weapon helping some firms survive. Examples of these beneficial technologies include:

* Artificial intelligence

* Neural networks

* Automated valuation models

* XML language, making easier company-to-company transfer of real estate data possible

* Application service providers

These types of advanced analytical services will be introduced into appraisal practice in different ways. Initially they may be provided by large, specialized vendors into which individual appraisers and firms can tap (the service bureau model). Over time, as their costs decrease, they will be incorporated into individual firms' operations.

Recruitment, Training, and Retraining

Historically, appraisers have entered the profession from other areas of real estate practice, such as brokerage, sales, or management and need to be trained in computer and business skills. In the future, the situation will be reversed. The next generation of appraisers will be more likely to come into the profession with well-developed computer and general business skills and backgrounds. However, they will lack experience and will need more specific training in real estate fundamentals.

Who delivers training/education and how? Online, distance education? Professional societies? Private, for-profit providers? The answer is likely to be a mix of all the above. But expect training in real estate fundamentals to be presented increasingly in simulation/video game format, rather than in more traditional on-the-job settings.

Increasing efforts will be aimed at retraining of older, computer-averse people in appraisal firms. We will see more firms blending multiple generations and perspectives, perhaps even adopting the reverse mentoring techniques pioneered by General Electric, in which younger staff are assigned to coach their older, less computer-literate superiors.

Harbingers of Change

Where will change take place first and how will it spread to the rest of the profession? Sophisticated technology will appear first in the residential sector. In fact, artificial intelligence programs and models that can identify and recognize patterns in large masses of data are now being used to perform quick calculations and analyses on large residential property databases, either privately or governmentally maintained. Real time valuations, provided by firms like Case, Shiller, Weiss, Primis, and perhaps soon by the Appraisal Institute itself, are among the first popular applications of the large data bases.

Data innovations in commercial property analysis will appear first in the world of commercial mortgage-backed securities (CMBS). As in the case of residential data, the CMBS statistical environment is rich and diverse. Also, users of the data are accustomed to doing thorough online analysis of multiple traunches of activity. The methods pioneered in CMBS analysis--precise, segmented, and layered data products--will spread over time to other forms of commercial property.

The large Dutch property investment funds have emerged as the first informal providers of international standards. These funds invest large sums globally and have developed standards and templates that start to provide a global common language for appraisal and valuation. They are in the unique position of innovating because they have to for their own protection.


The next few years will be fraught with turmoil and dramatic change in the appraisal profession, in the U.S., and around the world. This article has identified and analyzed some of the more important variables that will be in motion in the months ahead. While this state of flux and confusion brings with it risk for the uninformed, it also offers many opportunities for those appraisers who are prepared to navigate skillfully in the new environment of the 21st century with the set of skills developed through the educational courses developed by the Appraisal Institute.

James R. MacCrate, MAI, CRE, ASA is a principal in the firm of MacCrate Associates LLC with offices in New York City and on Long Island. Formerly, he was a director in the Real Estate Group at PricewaterhouseCoopers LLP in New York. He has supervised and performed real estate valuation assignments of all property types, real estate operating companies, family limited partnerships, allocation of shares for UPREITs, swaps, and portfolios. He has written seminars on land valuation, automated valuation, the valuation of real estate businesses, and is an instructor of Appraisal Institute courses. Mr. MacCrate received his undergraduate degree from Cornell University and his MBA from Long Island University, C. W. Post Center.

David L. Peterson is an independent Internet business advisor. He has extensive experience in bringing technological innovation to real estate and appraisal consulting practices. Mr. Peterson monitors and reports on new Internet and World Wide Web developments affecting the real estate industry and has taught in university and professional seminar settings in North America and Asia. During his professional career, Mr. Peterson has been affiliated with the real estate consulting practices of Price Waterhouse, Horwath International, and Booz Allen Hamilton. He has also served as a member of the graduate faculties of New York University and the University of Southern California.

The authors would like to acknowledge the following individuals who provided insight into their current and future practices based on a survey completed in November 1999 for a presentation at Ohio State University (December 1999) for the local chapter of the Appraisal Institute. Noreen Whysel, who conducted the survey, Frank Liantonio, MAI, Dan Bajadek, MAI, John Cherry, MAI, Steve Laposa, Chris Dollard, MAI, Brendan O'Brien, Steve Levine, MAI, Patricia Abeles, Bill Kinn, MAI, Robert Von Ancken, MAI, James Kafes, MAI, Dennis Duffey, MAI, Suzanne Mellen, MAI, Sue Slack, MAI, Robert Calloway, MAI, Anthony Graziano, MAI, David Brooks, MAI, Larry Brooks, MAI, and Patricia Bellack.
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Author:MacCrate, James R.; Peterson, David L.
Publication:Appraisal Journal
Geographic Code:1USA
Date:Jul 1, 2000
Previous Article:Family Limited Partnerships, Corporations, and Valuation Issues.
Next Article:Appraising Linear Subordinate Easements in Utility Corridors.

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