Thanks Paul. I talked to the Appraiser who did the most recent appraisal. He explained that his appraisal (and probably the one before it) reflected an area where there was no investment activity. Since then, my Brothers and I have purchased 2 apartment buildings across the street from each other. Also, the 2 dilapidated buildings on the corner are currently being renovated. So in his opinion, the appraisal, if done again, wouldn’t be as conservative.
I’m in the process of refinancing a small apartment building I picked up and rehabbed late last year. My guesstimate of the value of the building was based on a 5% vacancy and collection rate and (using the income approach) a 10.5% cap rate (or what the appraisal describes as the ‘overall rate’).
However, 2 appraisals I had done on the property (started to go with another bank when buying the property but the deal fell through at the last minute) have used an 11% cap rate with one bank using 10% vacancy while another (the most recent appraisal) used 8%.
Is it safe to say that when refinancing the building, the appraiser is going to use 8-10% vacancy/collection and an 11% cap?
Just trying to decide if it’s best for me to keep the building at this point or sell it.
I know the common perception is that financing appraisals are more conservative. I can tell you as a commercial appraiser who works as a bank review appraiser, that is not necessarily the norm - at least it’s not done intentionally. However, some appraisers are more conservative than others no matter the intended use of the appraisal.
How far apart in age are your two appraisals? Has there been a change in the market? Were they done by the same appraiser? As far as whether to hold or sell, that depends on your personal investment goals and perhaps an investigation into trends in your local market.