Paying Over the Appraisal Value
I'm currently negotiating with my landlord to purchase a fabulously located commercial/retail space I've been renting for a few years.   We had discussed a price, however the appraisal came back $260,000 less than the price we had discussed. The seller stated that appraisals always come back low, and doesn't seem interested in coming down. Im able to come up like $100,000 or so, but financing is based on the appraisal.  Is a $260,000 difference common in commercial trainsactions?  I'm a new to this, but would love to stop paying high Boston rents, and start building equity. What advice do you have?
[{"id": "g2df5bc", "text": "I've bought a LOT of commercial property in my life. I have never had a single appraisal come in below my offer. Do with that information what you will.", "replies": [{"id": "g2ijlb1", "text": "^^^^ this.    Assessment comes in low, but your appraisal should not.    You mentioned financing.  Who hired the appraiser? Your bank?   They won't (likely) fund you any more than 80% of the APPRAISED price, \n\nOthers have mentioned the recent fluctuations in the market.  You may need to remind your seller that he's currently dealing with a questionable market and the appraisal has considered that as a piece of the current value.  Not sure what method they used for appraisal either (income?)", "replies": [], "depth": 2}], "depth": 1}, {"id": "g2dfw9w", "text": "More often than not appraisers just say value is equal to the purchase price. Your landlord isn\u2019t going to have an easy time finding a new tenant if you leave. You have leverage here.", "replies": [{"id": "g2do191", "text": "if you threaten to leave you actually might have to go try him out, how deep are the landlords pockets ?  he might not care to sell for less", "replies": [], "depth": 2}], "depth": 1}, {"id": "g2dfxl2", "text": "There is so much variation in appraisals. I would make sure you like the deal because honestly I have never used an appraisal to value a deal, only for lending purposes. If you like the deal you have four options i see:\n\n1) pay the extra money above the appraised value when you close your loan\n2) talk to appraiser and tell him why you think it should be higher (comps or maybe it can be built more than they are projecting)\n3) negotiate down with the seller based on appraiser,(seems like you have tried this)\n4) find a new lender or ask bank to order new appraiser", "replies": [], "depth": 1}, {"id": "g2dg0zu", "text": "If you over pay by $260k, you're not building equity, you're digging out of a hole.", "replies": [], "depth": 1}, {"id": "g2di0ix", "text": "What buildings did your appraiser use for comps, are they really comps? Is there some feature or aspect of your building that makes it worth more but is not allowed to count in the appraised value? For example some mixed use properties in my area have former sheds or small warehouse spaces that have been converted and rented (legally) as residential, but because the county code calls the structures sheds, the appraiser calls them sheds too. Did a real live person do the appraisal or was it done by someone clicking through the comps on a screen?\n\nYour buyer's agent should be asking the seller these questions and trying to find a number that will work for both of you. Being willing to pay $100k over appraisal is definitely not the norm.\n\nWhile it's not common to ask to have the appraisal reviewed, it's also not a far fetched request, especially if there were few or no comps and if the appraisal was done remotely and not by an actual site visit.\n\nI'm expecting a lot of bankruptcies proceedings to begin by the winter when more and more regional retail fails because of Covid and related restrictions. Don't be in too big a rush to pay over appraised value in a market that is soon going to be experiencing distress.\n\nGo interview a few buyers agents and pick the one who shows some genuine interest in your situation. Start keeping an eye on the courthouse and what's posted there. Get all your paperwork ready (taxes, financial, credit scores, etc) so when the right deal comes along you are prepared.\n\nRemember the commercial loans are typically for a shorter term and a higher interest rate than residential and require a larger down payment as well. What would happen to your landlord/seller if you decided to move, would it be easy or hard to replace you?", "replies": [{"id": "g2ikivu", "text": "You asked a few of my questions too. Prob no brokers in volved and I agree on your possibility of a buyer's market coming.   Commercial property, though, doesn't often use comps-- should be income driven. \n\nOP are you the only tenant, or are there others?   Depending on your price, $260k can be lost pretty quickly on a cap rate rise.   \n\n(Fyi, anyone, this is often confused:   cap rates are income/rate= value. E.g. for what we call a \"10 cap,\"   100/.1=1000. Whereas  100/ .08 (8 cap)= 1250.   Therefore, Lower rates are more valuable.)", "replies": [{"id": "g2uxu57", "text": "Commercial properties should use comps as well. The opinion of value  should most likely be reconciled to that of the income approach, but any appraisal that only uses one approach is suspect. \n\nGenerally cost approach is for special purpose properties.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g2dp8lo", "text": "Yes. I suggest you get another lender to order an appraiser.", "replies": [], "depth": 1}, {"id": "g2dtpwd", "text": "How much do you pay to your landlord on an annual basis ? Divide that by the sales price. What's that number?", "replies": [{"id": "g2glc3m", "text": "The number is .053", "replies": [{"id": "g2h7avc", "text": "Does your landlord pay the real estate taxes, insurance, and maintenance or do you?", "replies": [], "depth": 3}, {"id": "g2h87aa", "text": "That (as a percentage) is sort of a cap rate. The real cap rate will be even lower since we don't know some of the details of your lease but for our purposes indicates you're getting ripped off. That number should be at least 0.06 or more. I personally wouldn't buy my own building for anything more than a 0.07. Owner users usually pay more but not that much more. Change the sales price until you get a more reasonable fraction. If not then look for another building to buy.", "replies": [], "depth": 3}, {"id": "g2v0m9x", "text": "What does this number represent?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g2f05k2", "text": "One rule of real estate is everything is negotiable. The main factors in your favor is the uncertainty with COVID. Other factors to consider is what your lease says. When you purchase the property, you can release yourself from the lease. Depending on the term left, this could be savings to you. Every situation is different. \n\nAppraisals are based on the all-cash value. If you\u2019re an owner-user, you probably have access to other sources of capital like SBA loans instead of a typical mortgage, so it\u2019s not surprising you\u2019re being asked to close the deal above the appraisal value. Just remember to negotiate, but make sure you understand who has leverage in the deal. Ego is also a factor. Just take everything into consideration before going forward", "replies": [], "depth": 1}, {"id": "g2ivt9g", "text": "Appraisers can make mistakes but they could also be helping you not make a big financial mistake in this case.  If it was a typical commercial appraisal they should have used multiple approaches to arrive at the value.  Read through each of them to understand their valuation better.  But without a doubt do not do anything else without getting another professional opinion about the situation.", "replies": [], "depth": 1}, {"id": "g2pnsi4", "text": "In my 7+ years in CRE, I've rarely seen a property appraised for less than agreed to purchase price. If so I would seriously look at your numbers again and see if the deal makes sense. If so have another appraisal done.", "replies": [{"id": "g2uxmvt", "text": "I'm an appraiser. I've certainly come in below contract value before, but I have to be completely lock solid that its a shit deal to come in low.", "replies": [], "depth": 2}], "depth": 1}]