Property Valuations In Uncertain Times

Adam Levine | Ostrow Reisin Berk & Abrams

Valuation plays a critical role in real estate, from appraisals for residential mortgages to the sales of commercial real estate. But the COVID-19 crisis and resulting economic uncertainty pose some challenges for valuation experts across the country.

Limited physical access

Site visits have long been an integral part of the valuation process, but stay-at-home orders blocked access to many properties earlier this year throughout the country.

Fannie Mae and Freddie Mac have recognized this hurdle by temporarily permitting exterior-only and desktop appraisals for eligible mortgages. Banking regulators allowed certain commercial and residential loans to close without having an appraisal completed, though appraisals have been required within 120 days of closing.

Savvy valuators quickly turned to technologies, like Google Earth, Street View and drones, to help fill in the gaps created by the inability to physically access properties. They are also taking advantage of online databases of municipality property assessment records to obtain necessary information.

Lack of comparable sales

Under the comparable sales method, valuators look at the sales prices of similar properties in recent transactions, making adjustments for differences between those properties and the subject property. It is debatable whether pre-COVID-19 sales can be considered comparable with post-pandemic sales, though. Moreover, deal volume for certain types of properties has fallen in many areas.

Valuators are looking beyond comparable sales and considering individual circumstances on a more granular level. This approach acknowledges that generalities are of limited value when COVID-19 may have different effects on different properties in the same neighborhood.

Tumultuous conditions

Essential data inputs for valuations are shifting constantly, sometimes daily. Unemployment numbers have been at historical highs, while interest rates have been at notable lows.

Businesses that were healthy months earlier have boarded up threatening the continued vitality of neighborhoods and increasing expected vacancy rates. Struggling tenants may have fallen behind on monthly payments. Governments are not only mandating rent relief, but also providing financial support to prop up troubled companies. Plus, operating costs may be higher to comply with health and safety concerns, as well as to adapt property use and features for changes in demand.

Valuators must address all these factors in their reports. But users of those reports must understand the limitations and consider obtaining fresh appraisals when fewer uncertainties exist.

Heart of the matter

2020 has not been kind to the values of many types of properties. But it is always better to have an accurate, data-based assessment of value than rosy, speculative estimates that do not pan out.

Determining Depreciation: The Definition of Actual Cash Value Varies Widely Between States

Chip Merlin | Property Insurance Coverage Law Blog | November 22, 2016

In yesterday’s post, Determining Depreciation–Are Policyholders Getting Ripped Off, I promised to discuss issues of actual cash value and depreciation. The article I am critiquing giving rise to this discussion cited California law regarding actual cash value and then made this statement:

In states in which condition is not included in the definition of actual cash value, actual cash value is generally defined as replacement cost less depreciation.

Is this true?

Most property insurance adjusters have heard of the Broad Evidence Rule. IRMI provides a fairly straightforward definition of this approach:

A valuation rule that has evolved in some states and does not adhere to the principle that the traditional measure of actual cash value (ACV) (replacement cost less depreciation) is the sole measure of value at the time of loss. This rule provides for the examination of every standard of value having a bearing on the property under consideration, such as the age of the property, the profit likely to accrue on the property, and the property’s tax value. Ultimately, it calls for the selection of that “value,” which, in the event of a total loss, will provide complete indemnification and no more.

In Being In The Minority – The Broad Evidence Rule, the Tomoney Knox law firm stated the following:

Property insurance policies often value claims based on “actual cash value.” The term is defined differently in different states and in various policies. When confronted with an interpretation issue, courts typically calculate actual cash value (ACV) as: (1) fair market value; (2) replacement cost less depreciation; or, (3) under the “broad evidence rule.” The majority of states, including New York and New Jersey, follow the broad evidence rule. Pennsylvania, our home state, does not.

As the name suggests, the broad evidence rule is an inclusive valuation method. It allows any evidence/factor that tends to establish the correct estimated property value of a building or personal property. Some permissible valuation factors may include:

original cost;
replacement value;
wholesale value;
market value;
economic and functional obsolescence;
condition and physical deterioration;
use; or
sales and purchase offers.

Given the flexible nature of the broad evidence rule, this list isn’t exhaustive. However, the price of flexibility precludes a bright-line test for determining exactly how much weight should be assigned to each potential factor affecting valuation. For this reason, each ACV valuation under the broad evidence rule must be determined on a claim-by-claim basis.” (Emphasis added)

So, when determining actual cash value, the first rule for all adjusters is to determine what rule is to be applied. Analyze the policy language and state law. Nobody should assume Actual Cash Value equals Replacement Cost Value less Depreciation. In the majority of losses, it does not.