subject: Why Professional Appraisals Are Necessary And Valuable [print this page] In a credit-driven economy, a lot rests on the valuation of assets. For the lender, a proper valuation ensures that there is no overspending, that they are getting what they pay for. If the borrower should default, this becomes particularly important: if the initial appraisal was incorrect, the lender may be unable to recover their principal. But by the same token it benefits the borrower: they know that they're not overspending, confirming the wisdom of the investment decision. Whether dealing with leasing real estate space or purchasing construction equipment, appraisals make sure that all parties know the true, established cost of the items in question.
Evaluating On Behalf Of Lenders
The primary interest of any lender is to place their money in a way that it will get returns. That means giving exactly as much as is necessary to pay fair market price for the collateral. There are two reasons for this. First, knowing the actual value is a key step in establishing a fair payment plan. It isn't in the interest of a bank to lend more than the actual value because it places an undue burden on the borrower. The idea is that the business or individual is able to in some way profit or support payment based on having the space or having whatever they're purchasing with the lent money. If that initial purchase is overvalued, they're going to be struggling to make it up, raising the chance of default.
Secondly, and perhaps more obviously, any amount of inflation in the price is going to prove dangerous if default does occur. Banks are comfortable spending money on loans in part because they're secured by something that could, in theory, be sold to make up for the initial investment. They might not be able to recoup any of the interest that would have been gained, but it shouldn't be much of a loss. However, if they lend at too high a value, suddenly they're unable to get it back again should a default occur. And considering the greater likelihood of default in that situation, it's a very scary prospect. That's why appraisal is almost a given in any kind of large lending situation. They're simply not willing to take the risk.
Benefits For Borrowers
Evaluations protect the buyer in the same way that they protect the issuer. An appropriate evaluation will remove the risk entirely. Only the necessary amount will be loaned, meaning that there will not be an undue burden of payment. This appropriate burden means that it should be easier to cover through profits from commercial activity or through wages if the property is residential. Likewise, technical or construction equipment appraisals make it more likely that proceeds from use will cover the true value.
For Leasing
It is notoriously difficult to find a common starting point to discuss rents or prices. Having a neutral evaluator come in and examine what's being offered and give their opinion on it can at least help the two sides reach an agreement. This is particularly useful when dealing with something that comes pre-furnished or otherwise pre-outfitted. Raw space is easier to evaluate (although still not easy). Technical and construction equipment appraisals are nearly impossible unless you're trained in it, which can make reaching an agreement substantially difficult.
