The commercial real estate appraisal can be a very interesting process. You often feel that you already know what the value of the property is, but now you’re waiting for someone else to see if they validate your opinion.
At the same time, you’re relying on an appraiser who may not be an expert at valuing your exact type of property in your exact geographical location. This is because appraisers often work on valuing a wide range of properties in many different cities. So when they’re valuing one particular property, they need to become as much of an expert as they can on that one property. As a result, they end up relying on the people who really are the experts.
They end up calling the commercial real estate brokers in the area who have closed transactions on what may be comparable properties, asking these brokers details about those transactions. From this information and from their own interpretation of how it applies to the property, the appraiser arrives at his value for the property.
In the process, different appraisers can come up with a wide range of values for a property. This can depend on which comparable transactions they’re utilizing for the appraisal, how they’re interpreting the information, and how well they understand the subtle nuances between the comparable properties that they’re using and the subject property that they’re appraising.
As an example, two comparable properties that the appraiser is using could be ten blocks away from the property being appraised – but with each property being ten blocks in the opposite direction from the subject property. The appraiser, not being a full-time expert in this particular real estate market, might not recognize that one of those two comparable properties is in an area that commands lower prices. The other comparable property may be in an area that is very similar to the property being appraised. If the appraiser is unaware of the differences in these areas, it will impact the value he will give in his written appraisal.
In addition, both the underlying reason for the appraisal and the instructions given by the person paying for it can affect the final value arrived at for the property. If someone is getting a property appraised just because they want to feel good about their own net worth, the appraisal may come in at the highest value that a buyer could expect to pay for the property.
But if a lender hires an appraiser because they’re thinking about lending money on a property, the lender is going to want to get a more conservative valuation of the property, and the final value given by the appraiser will probably lean more towards the lower end of what a buyer would pay for the property.
So when it comes to getting an appraisal, recognize that it’s a very subjective process, and that there are different underlying factors that will impact the final appraised value of the property.
If you disagree with an appraisal, please note that you will need actual and verifiable facts to get it adjusted. One of your best sources to get you the information that you require are real estate brokers that specialize in your particular type of property.
If your appraisal doesn’t come in where you need it to, following are a few of the things you can do to overcome this problem:
1. Renegotiate the sales price with the seller to get close to the appraisal or ask the seller to take a second mortgage where you may make a lump sum payment at a later date or a short term loan where the buyer makes monthly payments to the seller.
2. Increase the down payment to come into line with the appraised value. If this presents a major hardship to the buyer, then you may try to do a combination of getting the seller to lower the price and having the buyer put up a larger down payment.
3. Ask to see and review the appraisal. If you have some actual and verifiable facts that are different from the report, you can send them to the appraiser and ask for a meeting to discuss the differences.
4. You can ask the lender to get a second appraisal. Usually, you will have to pay for this second appraisal if the lender agrees to do it.
5. Apply with another lender.
Always remember that real estate always involves negotiation and compromise, so keep negotiating until you have come up with a solution.
As I say throughout my blogs, if you have any real estate questions that I can assist you with, please feel free to contact me, as I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.