Appraising/valuating a 8 unit apartment building

[Anthony Vander Meer]

hello all, 

I have an accepted offer on a 8 unit apartment building. I'm paying cash then doing a cash out refi. I am concerned the appraisal will come back low due to past small unit appraisals. What is the average a commercial appraiser discount the yearly rental profit using the income approach. I have the building valued at 850k at a 8 cap with my projected expenses. However I know appraisers many times just discount the yearly rent roll by 40-50% to come up with their NOI. 40% discount would value the building at $733k which would sink my cash out funds. Any help would be appreciated!!!

[Erik W.]

I don't get it.  You went into this deal "knowing" how appraisers reach a value, yet you did it anyway, and now you're asking how can we fix what you know the appraisers will do.  This scenario has the cart in front of the horse.  The issue needed to be addressed before making the offer.  

Worst Case: You may be stuck with 12-24 months of cash tied up until you can prove the appraiser's numbers were off and a new appraisal is warranted.  There isn't much you can do to influence the appraiser. They have rules to follow and are supposed to be beyond influence by Buyer, Seller, or financer.  "Supposed to be" is one possible way to salvage this.  I've seen appraisals all the time magically come in at a couple hundred bucks off from the purchasing price of hundreds of thousands of $$$.....like they can actually get THAT close!  I don't know how it works out, but sometimes it appears the lender's desire to do the deal factors in.

One other spot of good news is every commercial appraisal I've had done recently is an average of three approaches: income, cost to build, and comparable sales.  The appraiser will determine how to weight each approach based on local market conditions that vary from location to location.  So even if the appraisal comes in low on discounted income, your plan might be salvaged by excellent comparable sales.

Good luck!