If you’re a regular reader of this blog (and I hope you are, or will become one!), you will know that many of my posts, over the years, have to do with property rights. An important component of property rights is valuation of the property right taken, or at stake. Today, as part of my series with local appraisers, I am interviewing Matt Simmons, an appraiser and principal with the firm of Maxwell, Hendry & Simmons, LLC.
Carlos: What do appraisers do?
Matt: At the core, we value the bundle of rights inherent in real property. We typically determine the value through application of one or more commonly accepted approaches to value: the Sales Comparison, Cost, or Income approach. But within each approach the nuance of the overall rights remains the value driver. The acronym DUE encompasses the fundamental rights most fee simple real property possesses. These are the rights of disposition, use, and exclusion. When an action (governmental or otherwise) impacts one of these rights, the value of the property is almost always impacted.
Carlos: What made you want to become an appraiser?
Matt: Like many professionals, I was introduced to the profession through a friend. I began working in appraisal data entry when I was 19 and gained my initial trainees license the following year. I’ve always had an interest in real estate and the opportunity to analyze properties, solve complex valuation issues, and build a real estate centered business is incredibly rewarding.
Carlos: How do you work with attorneys in property rights cases?
Matt: We talked before about the fundamental rights (DUE) in real property. Often, we’re retained by attorneys to determine the value loss (diminution) caused by a loss of some or all of these rights. And it’s more common than you might think. An eminent domain action relative to a road widening or utilities project is probably the most commonly known instance. But changes in zoning, land use, variances granted to neighbors, floodways, or building code amendments are all circumstances where we’ve been retained by an attorney to evaluate the value impact due to a loss or reduction of property rights.
Carlos: What are cap rates and how do they figure in a valuation analysis?
Matt: Capitalization rates are really just an expression of the relationship between a sales price (SP) and net operating income (NOI), expressed as NOI/SP. So a property that has a sales price of $500,000 and has an annual net operating income of $50,000 would have a 10% cap rate. The cap rate is really a way of telling how much an investor is willing to pay for a particular stream of income. Lower cap rates are associated with properties that are perceived to have less risk. These include nationally recognized tenants with stable financials and longer terms leases. Recently, properties in this category have sold with 4-5% cap rates. While this is a seemingly low return on an investment, the rate is an acknowledgement that there is a low level of risk associated with it. In contract, properties with high cap rates are perceived to contain a higher degree of risk. Cap rates come into play for an appraiser by making sure you understand how a property would be viewed by a prospective buyer and what rate they would associate with the property.
Carlos: What valuation trends have you seen over the last six months in the vacant land market in Lee County?
Matt: There have been a number of acquisitions of vacant sites that are suitable for medium to large scale development. Prices have continued to rise on a ‘per acre’ or ‘per unit’ basis and developers have been particularly interested in finding sites suitable for multi-family development. We’ve also seen a number of marginal, infill, and environmentally challenged properties trade hands. This is a sign that our market is continuing to grow and mature. The ‘easy’ properties are mostly gone at this point and developers have to be more creative in looking for opportunities.
As you can see, property value is an integral part of the property rights framework. This comes directly from the Fifth Amendment to the U.S. Constitution, which requires “just compensation” if private property is taken for public use. Stay tuned for interviews with other local appraisers.