Issues identified in real estate appraisal reports (Part 1)

Real estate appraisal reports, being prepared by experts known as real estate appraisers, are often assumed to be free of errors. However, in reality, they are prone to insufficient logical structuring and mistakes, necessitating thorough examination and obtaining second opinions.

1. Instances of logical inconsistencies within the appraisal report (consistency with the previous appraisal)

Asset type: Factory

Purpose of the appraisal: Examination of real estate showing signs of impairment

Issues identified: In this case, a review was conducted last year, revealing discrepancies such as calculation errors, transcription errors, confusion or typos in specialized terminology, indicating problems with the quality of the appraisal report. While consistency with the previous year's evaluation would be expected for a property under continuous evaluation, it was not possible to confirm consistency with parameters like the adopted building replacement cost from the previous appraisal. Additionally, it was observed that adjustments for depreciation under the cost approach were not performed in accordance with the appraisal standards, but rather, accounting depreciation expenses were directly adopted as depreciation adjustments in the appraisal, indicating a lack of understanding of appraisal standards and guidelines. Moreover, the procedure for questioning the appraisal company did not yield reasonable responses, making communication with the appraiser difficult.

Review outcome: As the issues raised were understood by the users of the appraisal report, and consulting with them indicated that conducting a review concerning the building was impossible, a review was conducted only on the land (with a simple verification based on the fluctuation rate of the fixed asset tax assessment value for the building). Although this did not pose significant issues at the impairment recognition stage, stringent evaluation is required at the measurement stage, necessitating caution regarding the competence of the appraiser.

2. Instances where parameters with insufficient basis were adopted for the cost approach and income capitalization approach

Asset type: Hotel

Purpose of the appraisal: Determination of operating lease

Issues identified: The subject property, a hotel located in a rural area, had discount rates and final capitalization rates set lower than the levels of similar REIT hotel cases in the appraisal report, without any special reasons provided, indicating an optimistic approach. Furthermore, while the appraisal report adopted an income approach, which doesn't affect the valuation with construction costs, a review was conducted at the request of the appraisal report user regarding the construction costs adopted in the income approach, which were considered conservative based on actual business plans.

Review outcome: When we calculated based on REIT yield case levels for the mentioned parameters, there was approximately a 30% deviation between the final appraised value and the calculated value. Similarly, there was a deviation in the construction costs based on the business plan. However, upon verifying the lease determination based on our asset value and construction costs, no changes were made to the lease determination conclusion.

3. Instances where the normativity of adopting transaction case comparison method was considered low

Asset type: Land for a factory

Purpose of the appraisal: Examination of real estate showing signs of impairment Issues identified: The review aimed to verify the validity of the sale price associated with selling one-third of the subject property and measure the impairment loss of the remaining two-thirds. The price levels of transaction cases adopted for the appraisal's vacant land valuation were significantly lower compared to the sale price of one-third or transaction case levels of nearby properties. Considering factors like not accounting for the sale details of one-third of the property (which, according to a hearing with the Real Estate Appraiser Association, could still be adopted as an independent case), and the building yield being higher than the transaction case level in the residual land method, resulted in a significantly lower vacant land value compared to the expected sale amount for one-third, leading to substantial deviation.

Review outcome: The vacant land value in the appraisal report was considerably lower compared to the sale price of one-third, leading to an unreasonable logic, thus necessitating a revision of the appraisal report.