Appraisers Can Help Clients Navigate Natural Disasters, Appraisal Institute Says

In the aftermath of a natural disaster, such as a hurricane, appraisers can help their clients by providing expert market analysis, according to the nation’s largest professional association of real estate appraisers.

The Appraisal Institute’s “Guide Note 10: Development of an Opinion of Market Value in the Aftermath of a Disaster” addresses how real property markets in affected areas often exhibit instability, even chaos, and how analyzing data in such markets presents an array of challenges. The Guide Note, revised last year, also discusses how valuation professionals can develop credible opinions of market value in the aftermath of a disaster.

The Guide Note explores how property utility might be impacted by damage or destruction; properties might be more scarce because damaged or destroyed properties are removed from the overall supply; desire for property might increase because displaced homes and businesses need replacement space; and effective purchasing power might be impacted by changes in lending policies and practices in the area in response to the disaster.

The Guide Note further indicates that a disaster might have a drastic impact on both supply and demand, causing them to suddenly be out of balance. There may be a dramatic drop in supply due to destruction and damage. At the same time, there may be a spike in demand because those who suffered loss or damage to owned or leased real estate will need to find replacement space. This is especially true regarding residential real estate; people need to find alternative shelter immediately. As a result, sharp increases in asking and selling prices might be observed.

This raises several questions from an appraisal viewpoint:

• Do such higher prices represent “market value”?
• Are the parties to the transactions “typically motivated” and acting in their best interest or is their behavior irrational?
• Are the properties being exposed on the market for a “reasonable” length of time prior to sale?

These questions, and many others, demonstrate myriad ways in which experienced, competent valuation professionals can help their clients navigate the impact of natural disasters on property values.

Download the Appraisal Institute’s six-page “Guide Note 10: Development of an Opinion of Market Value in the Aftermath of a Disaster,” which originally was published in November 2010.