Low appraisal - Posted by BOB (CO)

import · January 12, 2006, 7:55am

Posted by BOB (CO) on January 19, 2006 at 08:50:16:

Ray and Paul,
You guys are the reason so many of us visit this site regularily. THat was great advice and I have made some progress with the appraiser.More importantly, you have reinforced my view that he may be wrong. With this information I will not make a decision to sell a property just on the opinion of this appraiser, but will use it as just one opinion of the property value.

Again, thanks so much for your time.
I will post any relevant news so others may benefit.

import · January 12, 2006, 7:55am

Low appraisal - Posted by BOB (CO)

Posted by BOB (CO) on January 12, 2006 at 08:55:32:

I own a commercial building in the Colorado mountains that I am having an MAI apppraisal done on in order to refinance and sell. THe appraiser called the mortgage broker yesterday and gave her the dollar amount and some explanation as to why it is so low. The mortgage broker and myself were both astounded at the low figure 1.55M(between 300K and 600K low). This works out to only $174 per sq ft exclusive of the finished basement.

I knew this would be a dificult appraisal as comperable sales near are almost nonexistent. The appraiser said that the only way to value is based on income(Income has still not reached 2001 levels, not close, even though we have turned the corner). Then he goes on and says that one of the properties we compare to has the same income but is a lot nicer construction? Where did that come from?
(It is by the way. it sold last year at $220 per sq ft and 2.2M but is 9 miles away in a neighboring town)
The original appraisal when we purchased considered all three methods and were very close on all three, although he had the purchse number to shoot for.

IN the small town where we are located new construction has really taken off and they are in the process of doing teardowns to get bare ground. New condos are breaking the $400 per sq ft mark and sellig quickly. Retail is slow right now as several have been built. The property is a lodging property but Im starting to wonder about best use or condo conversion. Another topic for another day.No new competition could ever be built for less than twice the appraised value.

I have researched the archives and gotten a lot of good ideas that include: going page by pag once I get the appraisal to look for errors and giving the appraiser any comps that i can find.Beyond this, any got any suggestions. At $3200 a pop, I hate to order another appraisal. Any suggstions are much appreciated

import · January 16, 2006, 11:31am

Re: Low appraisal - Posted by ray@lcorn

Posted by ray@lcorn on January 16, 2006 at 12:31:00:

Bob,

This has become a common scenario. I just told a local appraiser that I’ve worked with for years that I’m making a lot of money by proving his numbers wrong. He’s missed the market in NNN properties on the last three deals I’ve done, even though I’ve supplied comps to support my valuations. Last year I argued he was at least $500T off on a newly developed property, and then I sold the property for $650T more than his number. Even better, I’m getting ready to sell one that will bring over $1mm more than the value we argued about just a year ago.

Part of the problem is that the current valuations are so far above what any of us are used to that it’s hard to believe they are sustainable. Appraisers are charged with estimating value for a typical sale, which may or may not reflect current market conditions. They must assume average loan rates/terms and historical return on equity numbers. The problem is that both are now way below historical averages.

Another factor is that the construction data for replacement cost is lagging the market by at least six months. I can tell you that cost has soared, and per square foot estimations from Dodge and M&S are as much as 25% below bids we’re getting from our contractors.

And of all the real estate universe, lodging is perhaps the most difficult to appraise. He’s correct that income is typically the defining measure, but since 2001 lodging has been whipsawed by reduced incomes that result in valuations below replacement cost, and a significant decline in new property construction which reduces truly current comp data and ignores supply/demand issues. Now that demand is regaining pre-2001 levels, the supply chain has yet to catch up, making existing properties more valuable. To further muddy the water, the popularity of condo-coversion and condo-tels can create a situation where an existing property on a well-located piece of land has intrinsic value beyond the scope of typical appraisal methodology.

In your case it may be that current land sale comps around you may be enough to get the number where you need it. Or, you may develop a brief analysis of what it would cost to convert the property to condos and a projection of sale proceeds. Either way, you will have to provide the appraiser with more detailed information, along with a mini-business plan of how the property will justify the valuation.

You might also contact a hotel brokerage firm for help with comp data or suggestions for an appraiser who is a lodging specialist. Hotels are not pure real estate deals, and the segment is increasingly a specialized product, especially if a franchise in involved.

ray

import · January 12, 2006, 1:07pm

Re: Low appraisal - Posted by Paul Ness, MAI

Posted by Paul Ness, MAI on January 12, 2006 at 14:07:11:

Your approach is correct. Look for any glaring errors and provide any “relevant” data to assist the appraiser in re-examining their conclusions. You must understand that appraisers are often accused by owners of low appraisals for financing and high appraisals for estate valuation, so go with your hat in your hand. Most appraisers are willing to take a second look if there is more than just hot air coming from the other side. Also, as a bank review appraiser, I can tell you that the lender should be involved, as the appraiser is the lender’s client and must answer to and satisfy the lender with regard to regulatory requirements.