In today’s increasingly complex financial landscape, Certified Public Accountants (CPAs) are the unsung heroes behind successful businesses. Their role is multifaceted, touching upon asset valuation, regulatory compliance, risk management, and more. One essential yet often overlooked component of their job involves real estate appraisals. Here, we delve into some of the key intersections between CPAs and real estate appraisals, incorporating insights from our appraisers.

Asset Valuation

Valuing assets accurately is a cornerstone of a CPA’s responsibilities, whether for financial reporting, business planning, or securing loans and investments. Real estate often comprises a substantial portion of a business’s or individual’s net worth. A professional appraisal, factoring in market trends and depreciation, provides CPAs with a precise property value, crucial for making informed financial decisions.

Risk Management

In the realm of risk management, CPAs use real estate appraisals to evaluate a company’s risk profile comprehensively. The ever-changing nature of real estate markets, influenced by factors such as the recent interest rate hikes by the Federal Reserve, coupled with the uncertainty in commercial spaces, puts additional onus on CPAs to maintain up-to-date portfolio valuations. A professional appraisal, especially one that analyzes current market trends, allows CPAs to manage risks proactively.

Compliance, Reporting and Financial Statements

Regulatory compliance is more complex than it appears. CPAs must ensure financial reporting adheres to guidelines like Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). CPAs incorporate real estate appraisals into annual reports and financial statements. The accuracy of these documents is vital, not just for tax compliance, but also for shareholders, lenders, and regulatory agencies. 

Importantly, dealings with the IRS require Certified Appraisals from Certified Appraisers, especially considering the strict requirements the IRS imposes for reporting and appraisal reports. Automated appraisals, or Automated Valuation Models (AVMs), may not meet these stringent standards, making the need for professional, certified appraisals crucial.

Taxes and Reporting

Taxes are a financial consideration that every business must carefully manage, and CPAs play a crucial role in this regard. When it comes to real estate, the appraisal process significantly impacts how taxes are assessed and reported. 

IRS Requirements and Certified Appraisals

Dealing with the Internal Revenue Service (IRS) often necessitates specific appraisal requirements. The IRS requires a “Certified Appraisal” from a “Certified Appraiser” for many transactions, including charitable contributions of property, estate settlements, or gifting assets. These certified appraisals must meet the agency’s strict criteria and specifications, thereby ensuring that the appraisal is both accurate and legally defensible. CPAs must be diligent in ensuring that all real estate appraisals involved in tax-related transactions meet these stringent IRS conditions.

Estate Planning, Probate, and Litigation

Real estate appraisals are also indispensable in estate planning and probate scenarios. Accurate appraisals can impact estate tax liabilities and aid in equitable asset distribution among beneficiaries. During litigation—such as divorce settlements, partnership dissolutions, or disputes related to property—an accurate appraisal can be a decisive factor.

Capital Gains and Losses

In addition to property taxes and estate considerations, CPAs also have to account for capital gains and losses when a property is sold. An accurate appraisal establishes the fair market value of the property, essential for calculating the capital gains or losses that must be reported to tax authorities.

Corporate Transfers

Mergers, acquisitions, and other forms of corporate restructuring often entail asset transfers, including real estate. In such cases, CPAs can use real estate appraisals for accurate pricing, enabling smoother negotiations and fair transactions. The appraisal’s integrity is especially important, where an undervaluation or overvaluation could significantly impact the outcome.

Choosing the right appraisal service is crucial for CPAs. Attributes like accuracy, current market trend analysis, zoning analysis, and both prospective and retrospective analyses are vital. Boston Appraisal Services provide all these analyses in their comprehensive reports. Their expertise helps CPAs navigate the complexities of asset valuation, compliance, risk management, and more, particularly in a world influenced by emerging trends like market downturns and regulatory changes. Armed with this revised understanding, it becomes clear that real estate appraisals are more than just a complementary service for CPAs—they’re a necessity.

The post How Real Estate Appraisals Empower CPAs: A Short Summary appeared first on Boston Appraisal Services.

What’s going to happen with Boston real estate? In the coming weeks, months, and years, is it going to go up, down, or sideways? Is it time to buy or sell?

One thing’s for sure: No one knows. No one has a crystal ball, and there are countless factors that can affect property values.

However, in this article we’ll summarize the most salient points that most economists are talking about, and discuss what we think might happen with the Boston real estate market.

Boston, MA Real Estate Market Values over the Past Ten Years

• 2011: $400k
• 2012: $400k (+/-0%)
• 2013: $410k (+2%)
• 2014: $440k (+7.5%)
• 2015: $480k (+9%)
• 2016: $515k (+7.5%)
• 2017: $550k (6.7%)
• 2018: $610k (10.9%)
• 2019: $615k (+1%)
• 2020: $625k (+2%)
• 2021: $660k (+5.6%)

There’s a popular maxim that reads “the best predictor of future performance is past performance.”

When it comes to certain investment classes, this idea has been thoroughly debunked — but it largely holds true for certain areas in the real estate market. After all, the three biggest rules for real estate are location, location, location — and Boston still regularly ranks as one of the best cities to live in in the United States, and the world:

• Boston comes in at #13 according to BestCities.org
• The US News and World Report puts Boston at #18 in Best Places to Live in the US.
• Deutsche Bank ranks Boston as #1 in terms of “Quality of Life” in the US, and #8 in the world.

That doesn’t mean Boston will grow at the same rate as previous years. In fact, we think there’s some reason to believe that the days of fast growth are behind us — and there’s even the possibility of a looming crash.

All-Time Low Interest Rates Are Driving Up Prices — But Boston’s Growth Lags Behind the Average

To anyone even remotely involved in real estate, this shouldn’t come as a shock.

Interest rates are at decade-lows. According to Freddie Mac, one of the nation’s largest federally-backed mortgage companies, the rate for a 30-year fixed mortgage is at 2.8-3.0%. The average over the past 30 years has fluctuated anywhere from 3.5-6%.

However, the median sales price for all homes in the United States is up 14.3% year-over-year, while the picture in Boston looks a bit more bleak: only up 2.9% year-over-year. Personally, at Boston Appraisal Group, we’ve noticed a significant price decline in the downtown market, which could possibly signal an incoming crash.

Why might this be?

Great Migration Spurred by the Work-at-Home Movement

Some people have predicted that, due to the pandemic, work-at-home might just become the new normal. Two-Thirds of Massachusetts office workers said they would prefer to keep working at home even after the pandemic. With more people working at home, that might drive less business toward the city center.

After all, if you could buy a house for $200k in the suburbs 45 minutes away from Boston and the same house would cost you $800k to live in the city, if you’re working from home, it simply doesn’t make sense to shell out another $600k (unless you really want to lock in a big loan on a low interest rate).

A Lack of Migration into Big Cities

But even more importantly, while small numbers of residents might be moving out of Boston to the less-expensive suburbs, there’s another problem: more people aren’t moving in to take their place. Policy Economist Stephen D. Whitaker asked the question, “Did the COVID-19 Pandemic Cause an Urban Exodus?” in a recent research study. He tracked migration patterns using an anonymous survey that tracks Americans with a credit file (which includes 9 out of 10 Americans).

In and around the Boston area in particular, there’s a 15% change in outflow, meaning that 15% more people are moving out of Boston than they usually would, but also a 20% decrease in inflow (so 20% fewer people are moving into Boston than normal). The result? A 36% total decrease.

Many big cities, including Boston, have relied on a steady inflow of migrants to drive growth. But with lockdowns forcing many people at home and a workforce that’s gotten used to the idea of working from home, it might mean that the Boston real estate market isn’t poised for the same growth that it’s seen over the past ten years.

Conclusion: Boston, Massachusetts Real Estate Market Analysis

Over the past ten years, Boston market values have only gone up. If you bought a house in Boston in 2010, it’s increased by nearly 60% in value YTD. That’s one great investment.

But past performance is no indication of future success.

With interest rates at decade-lows, housing across the United States has been having its best year in a long time, but Boston real estate isn’t quite seeing the same level of gains, and that could be due to a number of factors.

At Boston Appraisal Group, we’ve noticed a downtrend in some of the sale prices in the downtown market, and we think it could — in part — be attributed to the overall migration patterns of the city in general: some people are moving out, but, even more importantly, fewer people are moving in, causing a 36% decrease in total migration.

Whether or not that indicates a coming crash is anyone’s guess. It’s also entirely possible that, as people become vaccinated, they start pouring back into big cities, eager to spend their savings on all of the world-class restaurants and cafes that an award-winning city like Boston has to offer.

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Welcome to 2020 with COVID-19, social distancing, self-imposed lockdown, and Zoom meetings. Rioting and protesting aside, I have to say that America has dealt with the lifestyle and work environment change quite well. But as life starts a trek back to a new state of normality, it will do us good to take a look at the real estate market and measure the impact of the Corona virus and how it will affect the market in the future.

COVID-19 Impact on the Mortgage Market

One of the positive results of this global pandemic is the affect it has had on the U.S. mortgage market. On March 15, the Federal Reserve lowered the prime rate to zero in response to the corona virus outbreak. This dropped 30-year mortgage rates to the floor – and we are happy to say that it stayed there. As of June 18, 2020, Freddie Mac reported in their Primary Mortgage Market Survey that 30-year fixed rate mortgages are averaging 3.13%. There are some lenders quoting rates as low as 2.75% for top-tier borrowers. This is the lowest rate in 30 years.

These low rates combined with easing of lockdown restrictions are going to drive a dramatic increase in purchase demand. In fact, activity is up over 20% from a year ago. “I think rate levels will be directly tied to the ability of the economy to recover. If it goes better than expected, rates would rise, and vice versa if things remain sluggish. Either way, the Fed is committed to keeping shorter-term rates lower for longer, and that will help to anchor longer-term rates like mortgages to some extent,” said Matthew Graham, chief operating officer at Mortgage News Daily.

What does this mean for borrowers?

Anyone who is in the position to purchase real estate should act now before the next corona virus wave hits. While mortgage rates may inch down a bit more, it will not be a significant shift, so there is no need to wait for rates to drop. On the other hand, if the economy recovers quicker than expected, we could see Feds bring the rates up a bit to slow demand.

COVID-19 Impact on Buyers and Sellers

These low loan rates are pushing buyers to risk virus exposure in search of better housing. This is good news for sellers who have suffered from a stagnate market during the first quarter of 2020. Compared with May of 2019, existing home sales were down 26.6%. This was the lowest level since July, 2010 and is part of a three-month decline in sales. Much of this drop can be attributed to peaks in the pandemic during March and April. The chief economist for the National Association of Realtors (NAR), Lawrence Yun, predicts that “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

During the height of the pandemic, new home construction ground to a halt. It is hoped that this will start to soon ramp up again to meet the rising housing demand. Without additional new homes coming into the market, home prices will rise too fast and quickly exceed affordability for first-time home buyers – even with the record-low mortgage rates.

Interestingly, the first wave of the pandemic has not lasted long enough to drive down sales prices and create a buyer’s market. The spring is a relatively slow period during a standard annual real estate season. The NAR reports that median sales prices in May increased 2.3% over last year establishing a median price of $284,600.

What does this mean for buyers?

Low mortgage rates mean you can get significantly more home for a much smaller payment. Now may be a good time to go shopping for a new home – especially before the predicted fall/winter second COVID-19 wave begins.

What does this mean for sellers?

We are not expecting price reductions at this time and experts are predicting an above-active summer of activity. Listings that feature virtual tours will have greater appeal to buyers who are nervous about virus exposure. Due to the increasing demand to work from home, home offices will have increased appeal. Families will appreciate private backyards and play areas rather than close proximity to public parks.

COVID-19 Impact on Investors

There has been less of an impact on the commercial real estate sector due to COVID-19. Cushman and Wakefield summed it up well when they said that “it’s premature to draw strong inferences about the virus’s impact on property markets. The commercial real estate sector is not the stock market. It’s slower moving and the leasing fundamentals don’t swing wildly from day to day.” While we are not seeing an impact on prices, rental rates, or investor returns at this point, there are areas that an investor may want to keep on the lookout.

JLL Capital Markets has recently released their COVID-19 Global Real Estate Implications report. As can be imagined, they stated that there will continue to be a high demand for medical office space, regional manufacturing facilities and associated logistics, along with storage space for companies with lean supply chains and low inventory cover. Office space offering a more flexible layout or private offices will have increased demand. If more businesses endorse a more permanent work-at-house outsourcing solution, there could be a period of office downsizing.

In a recent addition to the Immigration Policy, the new order will restrict J-1 (short-term exchange visas), L1 and H1 Visas. A reduction in international students, the ban on skilled workers and issuance of green-cards will pose short-term risk to the demand of housing created by these people.

What does this mean for investors?

With depressingly low government bond yields, real estate continues to offer good risk-adjusted returns in spite of any COVID-19 risk. JLL advises that based on the low interest rate environment; there is a good case for additional portfolio diversification.

Medical experts are saying that COVID-19 is going to be around for longer than we would like. Dealing with it is going to create a new normal, but the real estate market will survive. In spite of the health ramifications, experts in the real estate industry predict a strong recovery and stable prices.

The post What has Been the Impact of COVID-19 on the Real Estate Market? appeared first on Boston Appraisal Services.

This is a central topic in the lending business. Everyone involved in the process, including clients and industry professionals alike, appreciate a fast closing. Nobody likes dealing with the stress and uncertainty that arises when the transaction goes sideways (rather than forward).

Here’s a few thoughts to help keep things moving forward toward a successful closing.

Keep the Lines of Communication Open

This is a people business. Communication is vital to the success of any venture including real estate closings. The most common reason that things go bad in escrow is due to ineffective communication. Most of the points here are related in one way or another to the issue of communication. At the outset, get to know everyone involved in the transaction. Speak with the agents on both sides, as well as any escrow, legal, or other real estate pros participating in the deal.

Gather all the facts up front, directly from the source, and build the rapport necessary to ensure cooperation and the complete sharing of info.

Set Clear Expectations and Actions Plans for Clients

Let your client know what they’ll need to do, and what documentation they’ll need to provide to get preapproved and ready to purchase or refinance their home. Help them out by giving the guidance and direction needed to help them prepare in advance for a successful closing, before putting out offers. Prepare an outline of the process for borrowers as well as a timeline, list of milestones, and any other related checklists. This will also help the client’s representatives or agent assist in collecting documentation, in obtaining signatures, and keeping everyone involved committed and on the same page.

Coordinate with other Professionals – Project Management Tools

Sometimes we get along great with everyone on the team, but nothing seems to get done: weeks go by without disclosures getting prepared and submitted, one party or the other hasn’t signed the addendum, or the appraiser is missing-in-action working on revisions. The solution may be organization and convenient communication using project management tools to get everyone on track toward the same objective. There are a number of free and paid tools available that will help you connect with and share data across everyone involved in the transaction.

One of the best free tools is Trello. Trello is an online and mobile project management tool that utilizes an intuitive graphical user interface to let you create lists and cards with many features to sort, label, and assign tasks to specific individuals. It also has tons of plugins to integrate with most CRMs and online business service providers.

Fast Appraisals

Another source of delays and contention is in getting the property valued and certified by the appraiser. Agreeing on what appraiser to utilize, ordering the report, dealing with inaccuracies and revisions: all these things create many delays for lending professionals and everyone involved in the business. If you can find an appraisal firm that puts quality first and has an operational model built-for-speed, you’ll experience fewer delays approaching closing. If you have plenty of lead time, waiting for an appraisal may not be a big issue; however, when the report is needed at the last minute, a 48-hour appraisal (most residences) will get it done and allow funding to proceed, clients to be satisfied, and glowing referrals to pour in from customers and industry associates.

Please click here to place an order in seconds and get your always-expedited report going.

The post Guide to Quick Closings for Lending Pros appeared first on Boston Appraisal Services.

If you’re involved in the mortgage business, you may be feeling the recent industry concern regarding the fall in mortgage volume. While volume has made some small rebounds in September, the overall trend is toward a decline with a year-over-year drop in volume of 18%, and 39% for refinances.

Interestingly, according to MortgageOrb, the refinance share of the mortgage market increased to 32%, up from 29% in July. What does that say? We can only speculate that it might mean purchase mortgages may be declining in volume faster than refinance loans (contrary to the prior YoY figure) and/or the September bump in volume was enough to increase REFI marketshare.

Why has refinance volume and purchase mortgage activity declined? There’s no simpler explanation than rising interest rates and the resulting decline in demand due to rising financing costs. According to Freddie Mac, rates are anticipated to rise to over 5% by year end. Other factors include limited housing inventories and bearish investment due to the rising cost of capital and advancement in the market growth cycle.

According to CNBC, the majority of homeowners in the US have existing loans with rates below 4%. Considering this, we can hypothesize that the still limited need for refinance is even less due do the high refinance rates of the recent past that have already served/saturated the majority share of the refinancing market.

This situation is further complicated by the fact that rising rates are deterring homeowners from pursuing refinancing to take cash out or finance renovations. Borrowers are turning to second mortgages and home equity lines of credit to get the funds they need and to avoid refinancing into a higher interest rate on the full balance of their first loans.

So what does all this mean for the mortgage business and the future of REFIs? These cycles are typical and this time around, it’s not likely to be as severe due to consumer protection legislation, such as the Dodd-Frank Act, passed since the Great Recession. Additionally, many of the volatile market conditions such as the excesses in subprime lending and availability of credit aren’t present today to the extreme and detrimental degree as in the period leading up to 2007.

We’ll likely experience continuing rate increases, interspersed with brief periods of cessation where rates decrease slightly and REFI volume makes a short-term rebound. Once the economy cools in the next few years, the FED will cut interest rates and we’ll experience new growth in mortgage lending, especially refinances.

If you’d like to talk with the team and I about what’s happening with the economy and local market, please give us a call or hit the chat button to the right. Btw, that’s not a chat-bot, it’s actually us.

The post 🌊A Tidal Shift in Refinance Volume: Is the REFI Endangered? appeared first on Boston Appraisal Services.

What position do you want to be in when you exit your commercial real estate investments? If you put these 7 income and value boosting strategies to work, you’ll be on your way to a profitable project conclusion. The essential avenues to improve value include increasing demand, boosting income, lowering expenses, and reducing risk. The following approaches make sense in nearly any market and will improve the exit results of any commercial property investment.

Lowering Operating Expenses

This is the number one play in improving and supporting strong valuations in commercial real estate investments. It’s also the most direct, efficient, and fastest way to increase the net operating income (NOI). While other strategies can take relatively longer to see results from, expenses can be optimized in the near term to begin showing improvements in cash flow each period. Some of the key expenses to target are maintenance costs, energy consumption, water usage, labor, and administrative overhead.

Ensure individual metering of utilities to properly allocate costs to tenants and elect a NNN lease to assign responsibility for operating expenses to tenants. Lower operating costs improve the risk profile of the subject and make for a more attractive investment (and favorable exit).

Improving Property Condition

Although commercial real estate is generally valued based on the income produced, condition has a direct impact on value in the way it affects income and desirability. Improving look, appeal, and functionality contribute to tenant and user satisfaction, increase market demand, and provide leverage for lease-rate increases. Making improvements decreases the investment risk associated with the property, leading to a lower capitalization rate and a greater property value. While this will incur a short-term increase in maintenance expenses, the long-term potential for reduced capital expenditures and increased demand more than offset the cost.

Auxiliary Income Streams

The possibilities are endless. How many ways can you envision (while still maintaining the visual integrity of your property) to add some dollars to the monthly or annual cash flow?

Think outside the box here. Look at new technologies and ways to partner with other firms in the real estate (and broader) industry to offer greater value to tenants. If what you offer is valuable to occupants in terms of cost savings, utility, or convenience, there may be an excellent opportunity to quickly scale-up revenues and turn around a less-than-stellar valuation.

Some examples to get you on the right track to auxiliary revenue generation include vending, paid on-site/off-site parking, gym memberships, communications services, janitorial support, and rental kiosks.

Physical advertising space on the property can provide significant revenue generation potential (see building sides in any urban downtown). This is an area where you can get creative: billboards and banners are old favorites, but you can go much further in our digital tech-enabled environment. Leverage any communication with tenants, whether through emails, newsletters, or online property management platforms to tastefully monetize.

Leases that Protect Against Economic Risk in Commercial Real Estate Investments

You need a high-quality lease that protects from economic risk. Consider a triple-net (NNN) lease that will pass periodic increases in operating expenses on to the tenant. Hire an attorney to help draft your lease agreement and incorporate the ideal terms. Some important things to consider are lease length, indexed rate increases, expense allocation, responsibility for taxes, usage restrictions, and re-leasing (renovation, vacancy, and leasing costs). To protect the condition and ensure the compliance of the property with local zoning, specify clearly how the property may be utilized and the remedies available to correct to an inconsistent usage, including lease termination and injunctive relief.

Increasing Lease Rates

Tried but true, nonetheless stellar. If no lease is in place or it is due to expire soon, do the right thing and bring the rate up to at least market rate. In addition to a high-quality lease that protects you in all eventualities, maximizing the return through an equilibrium rent rate will make the property and opportunity most appealing. Charging more than market rate for the class, location, and condition diminishes demand and can lead to a greater chance of a lease break and extended vacancy. Conversely, underpricing the lease restricts income growth and may lock the property into an economic disadvantage as appreciation and lease rates rise.

Going Green – Reducing Operational Risk and Energy Expenses

We already mentioned reducing expenses in general but consider specifically how implementing sustainable strategies in your investments can reduce risk and the power bill. This is a strategy that sympathetically increases value by stimulating demand from an environmentally-conscious tenant base (becoming the norm). Sustainable strategies improve indoor air and environmental quality and reduce the potential for litigation and poor public sentiment due to sick building syndrome (SBS).

Employing Accurate and Credible Appraisals for Commercial Real Estate Investments

Lenders, investors, and stakeholders will endlessly scrutinize any appraisal report that supports the valuation of a commercial real estate investment. Experienced investors will question every assumption made by the appraiser in preparing the report. When the appraisal doesn’t meet the exacting standards of the commercial real estate industry and accredited investors, it damages the perceived value of the property and indicates a potential risk. Errors or poorly-supported reconciliations invariably hinder negotiations and delay closings.

We’re here to ensure you get the right valuation, without delays. Click here to schedule an inspection.

The post 7 Stellar Strategies to Boost the Value of Commercial Real Estate Investments appeared first on Boston Appraisal Services.

Adjusting for condition isn’t something that most appraisers love to do as it involves a significant amount of research to make an accurate estimate of the difference in value due to the condition of physical improvements.

The income approach to valuations is a relatively simple method that calculates the value of a property based on the net income it generates in the course of a year. An appraiser will use a multiplier called the capitalization rate to calculate the value. Valuations professionals like using this method whenever possible as the data regarding investor income and risk expectations is readily available by examining income and purchase price trends for a class of properties in a given market.

Often, less detail-oriented appraisers will focus too heavily on the income a property produces without giving adequate attention to the impact the property’s condition has on value, particularly in the long term. Even where a development’s income is relatively strong, savvy investors should consider how the condition of the property will influence ongoing maintenance and operational costs.

Older buildings, and those less well maintained, can suffer from a host of environmental and efficiency issues that potentially hinder the property’s exit value, contribute to liability concerns, lead to excessive energy and water expense, and limit tenant appeal, ultimately leading to losses and diminished returns.

In the case of single family residences, and those properties not intended for income generation, condition is a primary issue that appraisers must consider in the absence of financial data and comparisons. Adjustments for features are typically straight-forward using the paired sales analysis method; however, adjusting for condition requires more insight on how property condition influences appeal, functionality, and short-term/on-going repair expenses.

While a property’s value may be supported by the presence of comparables with very similar features, location, and functional utility, differences in condition can render a drastic disparity in value, especial within the minds of real estate consumers, personal and commercial alike.

The most professional and diligent appraisers and valuation firms place an emphasis on looking at the broader image when considering the property’s value. Equal weight must be given to economic, social, regulatory, and behavioral factors that influence the market value of a property. For those valuation professionals that really get into condition and understanding how the market reacts to property age, best use, and economic/functional obsolescence, they are able to deliver higher quality reports that perform more reliably in serving the sensitive needs of clients and borrowers.

The post Condition vs Income in Valuations. The Importance of Due Diligence. appeared first on Boston Appraisal Services.