Anyone that has done a deal in commercial real estate knows that one of the major pinch points in any transaction is the appraisal. Most financiers require it to limit their liability exposure and due to the cost of a commercial appraisal many would-be borrowers wait until they have lending terms in front of them before ordering it.
The problem is, commercial appraisals range from one hundred to two hundred and fifty pages and can take over a month for an appraiser to deliver. I have seen many deals fall through because an appraisal did not get delivered in time for a lender to fund before a close of escrow. It is not at all an exaggeration to say that the appraisal process is one of the things that hinder the liquidity of any piece of commercial real estate.
The reason this process is so time-consuming is that an appraiser has to research and verify all of the pertinent building information for each appraisal. According to John Meadows, co-founder of tech-enabled appraisal startup Bowery Valuation, the first thing that surprised him when he got a job in CRE appraisal after graduating from the University of Pennsylvania was that “around 75% of the work is just busy work. We would be checking the same websites over and over again and doing mindless copy and pasting.”
So, John, working side-by-side with his childhood friend from Berkeley, California, Noah Isaacs, sought to find a way to help automate the process. Noah studied applied mathematics and worked in baseball operations for the Blue Jays. He saw the glaring inefficiencies in the way appraisals were created and thought that he could harness his experience to modify the process.
After years of brainstorming while working for a New York City appraisal firm, they quit their jobs and dedicated their efforts to change the way appraisals in commercial real estate.
The main efficiencies, they found, came from four “pillars.” The first was using cloud architecture to enable mobile inspections. As one appraiser is uploading photos of a property, a teammate back at the office can instantly start using them in their report. This also means that no information is ever lost translating scribbled notes from an inspection into actual report verbiage. The next came from building a natural language generator. Appraisals are written in paragraphs, so converting raw data into readable prose was a large part of drafting the appraisal doc. Now, they are able to feed their information into an algorithm and it will produce the final, written product.
The third way that Bowery has found to reduce the time and cost of appraisals is to automatically integrate public record data. If a property’s address gets entered into their platform the most recent public record data from land use maps, zoning map, tax map, flood map and more are all automatically entered into the appraisal draft. All of these fields are still editable by the appraiser, but the head start the integration allows for can save their appraisers 2-3 hours every single day.
Finally, they see a lot of their ongoing efficiencies coming from what they called passive data collection. Every appraisal done by their software gets anonymized and aggregated which will later become another metric to test a property comparables’ robustness. This will create a network effect that will ultimately be a differentiator, allowing Bowery to create a product that builds on itself.
Pricing a property, like any other analytic process, is only as good as its input. For expensive decisions like setting a sales price, data accuracy must be double checked from the source itself. For appraisals, this means calling the listing agent to inquire about certain outliers. Having a single database of comps, like the one Bowery is building, helps streamline this process. As Noah explained, “If we find that a comp has issues we eliminate it from our database by calling and confirming. Generally, all appraisers would have to make the same calls. Now we can just do it once.”
Currently, Bowery is focused on the five boroughs of New York City, but they plan to expand geographically. Through an introduction from MetaProp NYC, Bowery recently inked a partnership with Cushman & Wakefield, which will help them grow while providing a proof of concept with one of the world’s largest brokerages.
Reducing the resources needed and lowering the turnaround time for a commercial appraisal will help Cushman & Wakefield in a number of ways. They can reduce their operational cost and allow brokers to close deals faster. It also gives them a distinguishable advantage over other firms for owners looking to lease or sell quickly. In the property world, time and money are inseparably intertwined.
The appraisal industry is only a small piece of the real estate pie. But, due to the interconnectedness between a property and its neighbors, changes in how appraisals are done can affect every parcel in every part of the world.
Technology is bound to change the centuries-old technique of writing commercial property appraisals. Bowery thinks that they have taken the lead in building that technology as the base for their service. With backers like Cushman & Wakefield, we might soon see everyone in the industry looking for faster, more affordable and more accurate ways to create the official statement of value that we call the appraisal.