Over the years I have had the unique opportunity to prepare, supervise the preparation of and review the work of others on thousands of commercial appraisals. Most of this work was prepared by competent professionals, yet many times there were variables that caused me to pause and question the results.

Examples come to mind of cases where two appraisals were prepared by different appraisers, who came up with substantially different results on the same subject property. In these cases, there was almost always one common thread that the work products had in common. The subject properties themselves exhibited unique qualities not found in the most similar or comparable properties having been sold and/or they were prepared at a time when the market was volatile and or unstable. Said another way, when we, as appraisers, are able to locate an ample supply of truly comparable sales, they are able to offer a scientific appraisal that is, for lack of a better term, bullet proof. Conversely, when we find ourselves in a turbulent market or our subject is a unique property, we must resort to professional techniques that more resemble that of a modern artist using less traditional techniques. In these situations, unless appraisers are able to demonstrate professional strokes of genius resembling those of Picasso, critics may easily shoot our work product full of holes, making it quite a contrast from being bullet proof.

How does the nonprofessional know when the appraisal is prepared scientifically? What evidence is there that the market might have been volatile? How do we know when a property is truly unique? These may seem to be simplistic questions that are easy to answer. This is likely to be the case when the user of the appraisal is familiar with a property, but this is not always the case. It may be easiest to understand, when we all know that the market has tanked, as we have experienced lately. Even when we have reason to question these issues, we do not always know to what degree a property is affected by its uniqueness or an irregular market. In an attempt to address conditions that render an appraisal less than scientific, listed below are 10 appraisal review red flags. I refer to these as Dumb Blonde Appraisal Review Red Flags, because they are so basic a dumb blonde could spot a problem appraisal when using them.

1. Approaches to value yield a broad range of results. If the range of values stated in the appraisal resulting from the sales comparison, income and cost approaches to value vary more that 5 percent, this is a red flag. This should not be accepted as a foregone conclusion that the appraisal is not accurate, but it is an indication that the appraiser was not able to be truly scientific in his preparation of the appraisal and that there is more risk associated with the final value conclusion.

2. Projected net operating income (NOI) exceeds that of past. It is possible that the NOI is legitimately increasing for the subject property, however, be vigilant. In such cases, evidence should be shown; otherwise pie-in-the-sky projections should be rejected.

3. Vacancies exceed 5 percent. If the property has historically or worse if it is still experiencing a vacancy percentage of 5 percent or more, research should be performed to determine whether there is concrete evidence that the property will be close to full occupancy in the future. If there is more than a 5 percent vacancy, this not only represents a potential loss in rental revenue but also is an indication that there is something that needs a more detailed explanation.

4. There is a significant amount of deferred maintenance. If material deferred maintenance exists in a property this must be addressed. Questions should be asked as to why. Was it because the property is not financially self supporting or that it is poorly managed? Either could indicate a problem that should be more fully investigated.

5. There are month-to-month or short-term leases. Most successful commercial properties are leased long term. This represents stability. Of ces are typically leased on three-to-five-year terms or longer, shopping center spaces sometimes are leased for 10, 20 or even 30 years, in the case of anchor tenants. If the subject property is leased monthly or for very short periods, this should be investigated to determine if the tenants are stable and if the property is capable of attracting good quality tenants.

6. The NOI is less than 125 percent of the debt service. In order to insure that a property is capable of servicing its own debt and returning to the investor a reasonable return on investment, it should throw off an amount of income to service the debt with a margin for safety. If this is not the case, more research should be done to determine why.

7. The appraised value substantially exceeds estimated replacement cost. If the cost to replace a property is materially less than the estimated value, this is a red flag. It may be that the estimated value is too high or that there is an opportunity for other investors to build nearby and undercut the subject property with cheaper rents. For newer buildings, astute appraisers typically restrict value opinions to the lower of the cost approach value indications and that generated by the sales comparison and or income approaches.

8. The projected market rent exceeds the current subject or comparable rent. It is not unusual for a broker, or even an appraiser, to suggest that a property can generate a higher rental rate than that currently experienced by the subject or comparable properties. My idea on that is, "Show me; don’t snow me." If a property is not performing at its capacity, there must be a reason why.

9.  Comparable offerings are not addressed. When an appraisal does not show comparable listings for sale or lease, I get nervous. Why are these not shown? They should be offered to the extent that they exist for examination. All too often, appraisals do not disclose competing properties that undercut the future position of the subject.

10. There is no disposition, liquidation or go-dark value. Market value may not suffice where there is potential for business downturns. Insist upon alternative values in the appraisal aside from the standard market value. It will be rare that a nonperforming or sub-performing property sells for the same price as a property not experiencing such hardships. Investors and lenders alike should have information at their disposal to perform "what if" scenarios in case of foreclosure or liquidation.

In summary and conclusion, in a perfect world when an appraisal is prepared on a subject property, possessing no rare or unique qualities, and when market conditions are normal, the reviewer can view the appraisal as relatively scientific, and his or her job is usually straightforward. Conversely, when the subject property is unusual or when market conditions are turbulent, the appraiser, no doubt, had to resort to a form of art to prepare the appraisal, and critiquing the appraisal becomes a chore that will likely challenge the most seasoned investors and financiers. Not only is the estimated value of the property an issue, but the risk associated with a property is also called into question. In such cases performing a thorough red-flag review of the appraisal is in order, and any unanswered questions should be addressed with the appraiser. Upon completion of the review, an assessment should be made as to the exposure to risk the collateral presents. The conclusion is not just a yes-or-no decision concerning whether a purchase or loan should be made, but, in many cases, how. Savvy investors and quality-control lending officers will tailor a transaction to match the risks with the opportunity. Issues, such as sales price, percentage of down payment, interest rates and closing fees, must be considered in the final decision.

Not only is there science and art to performing appraisals, but the same can also be said about the process of developing a property, purchasing a property or  financing a property. The most successful investors, managers and lenders will recognize the difference and manage their business accordingly.