I work in the Commercial Real Estate (CRE) Valuation industry. I learned a lesson of great value in 2014: Invitations to a more transparent, efficient valuation industry are not always welcome, even in an industry entirely premised upon transparent, efficient markets. I know this because I developed a business model and was preparing to launch an online marketplace to match valuation industry consumers and providers. However, I cut the cord on my start-up prior to launching, unconvinced that either valuation consumers or providers were willing to change established ways—at least not yet, and not for me.
Transparent, efficient markets do not benefit all. Filling information gaps extracts profits from the biggest beneficiaries of asymmetrical information. Coercing change, even at low dosage, is complex in any industry. It is especially difficult when 62 percent of the profession is 51 years of age or older (compared to only 33 percent of overall workforce at 50 or older). It’s near impossible to exact change in a profession where straying from convention can mean banishment. Professional standards dictate appraisers must follow practices of their peers in certain aspects of the valuation process.
I designed a relatively simple tool to strengthen the positions of both consumer and provider. A national database of identities of recently appraised properties was the basis of the plan. Matching pending appraisals to those recently completed would provide consumers a starting point in the appraiser selection process.
Appraisers that perform repetitive work are positioned to offer lower fees with faster delivery. An active job data reporting system would enhance prospects for repetitive work.
The industry’s information shortcoming is demonstrated with a hypothetical:
You’re hungry. Lasagna sounds good. You hit the restaurant district with its many options. In this market all the restaurants look the same, none have menus, and none list prices. You visit a few of them, learning each has a chef that will cook virtually any request.
You share your request with some of the chefs. Each offers a price and approximate serving time. Armed with this information and limited observations, you order and hope for the best.
You re-survey this quirky restaurant scene. Then it strikes you: Mongolian Beef! That faint aroma lingering inside…yea, you’re willing to bet on it—maybe the only thing you’d bet on in this mysterious marketplace. But far from a reassuring finding.
That’s the consumer perspective. Let’s pull the curtain on the restaurateurs...
Your lasagna chef is in the alley plucking together some tomato paste and cottage cheese through exchanges with neighboring chefs desperate for flank steak and scallions. She’s not made lasagna recently. However, she references the same Italian cookbook as the other chefs.
Your chef hopes she gets more lasagna orders tonight since she now has the ingredients and the skill. She’s unsure about advertising this product, though, or any for that matter. Seems a little risky. Competitors knowing what she’s up to…
Nor does she want to give the impression she’s a “one-trick pony.” Better to serve disparate cuisines to meet any and all individual specification! She hurries to finish her Chicken Tikka Masala. You have any paprika?
The CRE Valuation profession has a broad umbrella. It covers everything that’s not a house. Yet a CRE appraisal license typically has no limitations on property type. There could easily be over 100 different property classifications.
CRE Valuation can be cryptic for first-time or infrequent consumers. Its occupational sexiness is roughly equivalent to cost accounting. Hence, valuation service consumers are often content remaining uninformed. Many don’t know what they don’t know.
Appraiser directories are plentiful online. However, details are scarce within these rote listings of names. Directories offer few meaningful ways to sort or compare appraisal firms. It’s really easy to find an appraiser—really hard to find the most appropriate.
Measuring appetite for change
I conducted my first meaningful market research in a local chapter meeting. I offered payment for completing a short survey. I left the gathering of about 60 appraisers holding only one completed survey. Disheartening. Still worse, the lone participant had no interest in any appraisal-matching program.
Ultimately, I received nationwide feedback from dozens of appraisers. The most common response was akin to, “Hmm, sounds like a good idea, but I don’t think I’m interested.”
New entrepreneurs must understand the automatic resistance factor, or the human tendency to spontaneously oppose further alterations to a rapidly evolving environment. I estimate 65 percent of respondents felt this resistance. Some softened their instinctive opposition after further explanation; some didn’t.
Granted, as far as salesmen go, I’m definitely an appraiser. Despite my shortcomings, the concept was relatively simple. Yet eventually it seemed I could not have given away new iPhones if recipients were required to disclose only their color of favor. I know these middle-aged to upper-middle-aged, white men who dominate the industry. I am him. As a unit, we’re risk-averse, change-resistant, and data stingy. Nevertheless, I trusted that we are good judges of value.
My consumer surveys revealed some acceptance of matching current assignments with similar, recently completed jobs. The business plan included the ability to analyze firms’ areas of expertise based on a whole body of job history data, which was attention-getting. But interest waned when fees were discussed. Some responsible for ordering and managing the appraisal process seemed to fear that availability of empirical appraisal data would diminish the value of their industry knowledge.
It’s well-known that some consumers desire a report that is just good enough. A matching system will have no value for these consumers. Those who select appraisers based on their malleability also would have no use for me.
Self-correcting markets ahead?
Valuation firms continuously regenerate data and analysis already performed by competitors—costing time and money. Providers are thinly spreading their knowledge across a broad spectrum.
More sophisticated, specialized analysis of CRE is burgeoning outside of the valuation services profession. If the valuation industry fails to steward its own waters, then the Federal Government or Big Lending, two major recent influences in residential valuation, may steer the ship for them. Even more likely, a strong, strategic marriage of technology and CRE could destroy current barriers to transparency and efficiency and reap a pirate’s booty upon reshaping the industry.
Meanwhile, I find myself now revaluating all my marketplaces. Are they also less open, efficient, and self-correcting than I assumed?
Gavin Mogan is owner of Appraiser Matters LLC. He can be reached at mailto:[email protected].