Recently, I had the opportunity to perform an appraisal in Costa Rica. The function of the appraisal was to evaluate a property to be used as collateral for a mortgage loan; in much the same way as it would be done here in the United States. While Costa Rica is a foreign country and offers many differences, it has much in common with our country, if for no other reason than that much of the real estate there is owned by United States citizens. Actually, the client on the project was a United States-based bank and the property owner was a United States citizen.
The fact that the assignment was in another country did not relieve me of the obligation of preparing a professional appraisal. While the client making the loan will have collateral outside the country, the lending regulations are the same, if not more stringent, and there is every expectation that the appraisal conform the Uniform Standards of Professional Appraisal Practice (USPAP), a very U.S. requirement. That having been said, it would be fair to point out that appraising property in other countries, especially countries with fewer or different regulatory requirements, offers challenges over and above those that appraisers are typically subjected to when appraising in the United States.
Before getting into some of the specific challenges, one of the questions that I am sometimes asked in doing such an appraisal is: “How would you know enough about the area to do an appraisal there? This brings up a subject typically referred to as "geographic competence.” In the United States, it is not uncommon for a lender to complain about an appraiser traveling 30 miles to do an appraisal, especially if the results do not turn out to favor the closing of a loan transaction. When this is contrasted to the traveling of hundreds or even thousands of miles, the question would likely seem more apropos. My response to such a question is that it is better for a proven professional to perform an appraisal in a somewhat unfamiliar territory than assigning the task to a local person who lacks the qualifications to perform the appraisal correctly. Many countries, including Costa Rica, do not have licensed real estate brokers or certified real estate appraisers. Furthermore, the professional appraiser from another country would likely be ill-equipped to follow the requirements of an appraisal used for a mortgage loan in this country. USPAP would be unknown to such an individual, and this is the basic requirement of any appraisal used for collateral here.
To carry the subject a bit further, it is not unusual for a certified appraiser to cover more geographic territory for more unusual or demanding assignments. The fewer local professionals there are available to perform a task, the more need there is to bring in a professional from a greater distance. This is especially true for appraisals of commercial properties. The challenge of following USPAP alone would seem almost insurmountable to an outsider not steeped in the education and regulatory environment of our country.
Is local knowledge required to perform a creditable appraisal? Some say yes, and in principal, I agree. To be more succinct, I would prefer subscribing to the term possessing adequate local market information. Generally, the term “local knowledge” is used because it makes doing an appraisal easy. One does not have a need to do nearly so much market research when local knowledge is available. Said another way, local knowledge is cheaper and quicker than exhaustive research. Finally, once the proper research has been completed, those from outside the market will possess the necessary local knowledge to perform a creditable appraisal.
While geographic unfamiliarity offers the traveling appraiser a challenge, perhaps one of the biggest obstacles for the appraiser to overcome in less developed areas, whether one is local or from out of town, is finding a source of reliable market data. In many localities, the Multiple Listing Service (MLS) is foreign to the vocabulary of local real estate practitioners, and having access to an online property tax database is either non-existent or not readily available. In these markets, data is usually horded by a few people who have small snippets of information, which they develop firsthand from transactions they handle. In these cases, they are among the few who know about specific transactions; however, there are tons of transactions that they just do not know about. In these situations, everyone suffers, since no one can know about the entire market. This makes for a less efficient system and produces fewer professional appraisers who have complete knowledge of the local market. This problem seems to be less of an issue for local banks in these areas. Perhaps this is because they do not have the same appraisal requirements as do banks in the United States.
Given the above scenario, my challenge in Costa Rica was not just my unfamiliarity with the market, but my need to obtain information in a timely and cost-efficient manner. Fortunately, I was able to befriend three of the most active real estate brokers in the local market and they helped me get up to speed quickly on what was happening in their market.
Another challenge in such markets is the language barrier. U.S. lenders expect their appraisals to be delivered in English, even if the property is located in a land where few, if any, people, who refer to themselves as appraisers, read, write and speak English. Since all public records in Costa Rica are written in Spanish, this necessitates a bit of translating.
Along the same line, the local money is not measured in U.S. dollars. There, it is measured in colones, a completely different medium from what we are accustomed to. At the time of my visit, a U.S. dollar was worth 516 colones. This required translation and further calculation
In the end, the boundaries between countries offer challenges to those making mortgage loans, regardless of who does the appraisal. This will almost always equate to a more expensive, time-consuming and complicated appraisal assignment, no matter who does the work. In foreign countries, there will sometimes be local professionals competent enough to provide professional appraisals which conform to the standards of the lending community in the United States, but usually not.
The difficulties in appraising internationally, created by lack of accessible market data, local customs, language, different monetary systems and related issues, make for an interesting stew frequently favoring the travel of United States professionals over hiring local appraisers in parts of the world that do not conform to the requirements of our own system.
In closing, I would like for the record to show that the country of Costa Rica is a beautiful place, and that it is understandable why those fortunate enough to have property there do so.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or e-mail [email protected]