Need Help With Our Appraisal

[Emeo C.]

Hi all,

Happy holidays! : ) So glad to find a forum that is so lively and full of friendly members. I need some help with appraisal and would like some advice.

I own a 11-room guest house with a partner. We have been operating for the last 7 years. However we are starting to get a little tired and would like to sell it if we get a decent profit.

Our NOI is about $150K a year (2008 - 2010). And our occupancy rate is about 65% for the last 5 years.

2 weeks ago we hired a lcoal bank-approved appraiser and we just got the appraisal back.

The appraised amount was not that great. But looking into some detail and we found that the appraiser had forced a $30K "management fee" into our NOI and now we only have $120K NOI.

Also the appraiser got a cap rate survey from a company in Florida. Based on that survey, the range for our industry was 9% - 17% and he decided to give us a 12%.

Here are my questions:
1) This business is small enough that we manage it ourselves. We never hired any managerial help. But we do have part-timers to cover some of the hours at front desk on weekends, and we did include it in our original "operating expense". So is it fair for him to force an expense like that?
2) I have been doing some homework myself prior hiring the appraiser. I have searched online and found HVC, BCRE and other Bed & Breakfast valuation professionals have surveyed or mentioned a much lower range of cap rate for hospitality industry around 9 - 11%. So we are a little bit puzzled.

We will meet with the appraiser next Tuesday and I am planning to bring all the research I have done to show him. I am hoping that he would adjust the appraisal.

What do you guys think? I would appreciate any opinion. Thanks. : )

[Joel Owens]

Didn't read all of it.

Business brokerage is only the business.When you have a building you own and the business the value is different than buying just a business with the lease structure and rent increases.

The appraiser will value it as if a lender had to take the property back the bank is NOT going to manage it themselves.A small percentage of buyers might but not a majority.So the bank underwriting the loan is going to plan for the most probable set of circumstances and be on the safe side with their assessments.

If you want to do some owner finance with money down to replace your income with a cash out at a later date that might be possible.Many deals are happening that way.

Lending standards on businesses have tightened up leading to owner finance and this is also with real estate property as well.Not many want to put down the cash or meet the requirements the banks are dishing out.

So I hear your arguments but the people lending the money for the buyer will not care.If you want higher money go owner finance (within reason) but if you want it all now expect a much lower price.

With businesses it comes down to how old the equipment is,is the business seasonal (the owner is showing strong books for half the current year and then sales plummet),is the lease fixing to rise,are the streets fixing to be reconfigured to reduce traffic flow,is nearby new businesses reducing returns,etc.,etc.

There is a real reason you are selling and the buyer will dig it out.Specialty asset trades such as your carry more risk which increases the CAP and lending standards.

I think the evaluation doesn't sound that far off to me.Try to look for a retiree with 401k money etc. to dump into a business putting half down and then cash you out a few years down the road when lending gets easier.