Do I need an appraisal?

[Robert Lindsley]

Hey there,

I'm in the process of buying a multifamily building (7-unit apartment building with an additional commercial space).  Getting the final PA has taken awhile, but I'm finally ready to move forward with inspections, appraisals, and environmental assessments.

I'm trying to figure out if it makes sense to do an appraisal.  From a financial perspective the property makes sense, but what would an appraisal tell me?  How would somebody even appraise a property like this (assuming there are few/no direct comps), would they do it based on cap rate?

I'm looking forward to hearing your thoughts on this.  If an appraisal would be useful and accurate it seems like it would make sense, but not sure that either would be true in this case.

Thanks!
Robert.

[Bruce Petersen]

A major commercial appraiser will have no problem assigning a value, they will look at comps and financials. 

And to your main question, YES!   I would always want an appraisal even if your lender doesn't require it (they all will by the way) because what it you buy it then time to sell and your buyer gets it appraised and it won't, uh ohh. 

If you're worried about the cost associated with it, either you are being short sighted or the deal doesn't work if you can't afford the $2500-5000  

Just my thoughts. 

[Ray Harrell]

If you're getting a loan an appraisal will be required.

[Bruce Petersen]

A major commercial appraiser will have no problem assigning a value, they will look at comps and financials. 

And to your main question, YES!   I would always want an appraisal even if your lender doesn't require it (they all will by the way) because what it you buy it then time to sell and your buyer gets it appraised and it won't, uh ohh. 

If you're worried about the cost associated with it, either you are being short sighted or the deal doesn't work if you can't afford the $2500-5000  

Just my thoughts. 

[Robert Lindsley]

Thanks!  the property is being financed via seller financing so there's not a bank contingency.

I'm not adverse to doing an appraisal if it makes sense.  But I want to understand what the value is beforehand.  If an appraiser comes in and says "Well, the house down the street is worth $150k so that's what we'll comp this at" then I've just thrown $2500 in the garbage.

Do you know if a commercial appraiser uses a specific formula, or do they look at the rental income numbers?  I guess I just don't understand how it's different than a regular residential appraisal.

Thanks for your help!

Robert.

[Eric Fegan]

A commercial appraisal is similar to residential in that the three approaches to value: Sales Comparison, Income, and Cost are all considered.

I don't know your market or the age of the property but most likely the Income Approach and Sales Comparison Approach would be developed. Cost Approach might not be applicable if the building is older.

For SCA appraiser will consider sales of similar size buildings- maybe 5 to 12 units within the neighborhood or city and then make typical adjustments. Unit of comparison could be per door (unit), per Sf, or total property, etc.

Not sure if the balance of value between MF and the commercial building but if I couldn't find similar sales I would probably use a combination of both MF and commercial comps- assuming a retail or office space.

Income Approach- appraiser will reconstruct the operating statement from market data and then will develop and opinion of the NOI and overall cap rate. All of this data should be supported from the market.

Make sure to hire a certified general appraiser because a residential appraiser can only appraise up to 4 residential units.

[Robert Lindsley]

Thanks @Eric Fegan for this info.  I'll see if I can find recommendations for a certified general appraiser in the area.

Thanks everybody for your help with this!

Robert.

[Russell Brazil]

It's also important to note that if there is no listing agent involved then the appraisal number will come in low. Just a fact of life.

[Robert Lindsley]

@Russell Brazil That's interesting. Could you explain why that is? Does a listing agent work with the appraiser on the comps?

Since there are no agents involved with this deal, does that impact the decision on whether I should get an appraisal?

Thanks!

Robert. 

[Eric Fegan]

You should not have a difference in value if a realtor is involved or not. Sometimes a realtor will have firsthand knowledge and more in depth of transactions than an appraiser.

If an agent only shares data that indicates a higher value then you could see an minor increase due to the information available.

My advice is that if you know the market- both geographically and by product type- then you don't need an appraisal. If you don't know the market or question the value, pay for an appraisal.

In my market, seller financing often comes with an above market price tag because it allows a buyer that couldn't buy any other way get into the property.

[Rolanda Eldridge]

@Robert Lindsley..Yes, order an appraisal.  It's worth the $$$  It will give you ballpoint for true value...Sounds like a good deal with owner financing(creative)!  Ok to pay a little more without hassle of 1000 sheets of paperwork, 3-4 months of time and bank..After some time, you can refinance or not...