Investor · Nixa, MO · Member since 2016 · 20 posts · 14 votes
Currently in negotiations to purchase an off market 5+ unit apartment. The owner provided the T-12 and rent roll, but wanted to hire a local commercial appraisal company to get an idea of what he should sell the property for. The appraisal company calculated the appraisal based off of their own pro-forma instead of the actual T-12, which increased the value of the property and his asking price.
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
3y
@Matthew Cope, an appraiser is given a question and some assumptions. So, in this case it sounds like the appraiser was asked to appraise the property for what it would be worth if maximized. Of course, the seller, isn't presenting it that way but thats the nature of it.
I would use that to my advantage and tell the seller it will cost me $X and several months of effort to bring the value up to that amount and of course there needs to be a premium for my effort. So, I can offer $X. You just need to explain how the current property doesn't match what the appraisers assumptions were and what it will take to get it there.
Hard for a seller to come back with any rationale for you to pay more when you use their own numbers as the starting point.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
3y
That's what the value could be once some work is completed, and doesn't mean much beyond that's what you're trying to obtain. A bank will order an appraisal to determine the value today and that is what they'll base their lending on....you can't buy and get regular financing for what something could be, just what it is today.
Real Estate Agent · Sarasota, FL · Member since 2020 · 140 posts · 75 votes
3y
As the others have mentioned, it sounds like the appraiser valued the subject at market rate or provided the stabilized value. If the subject is not currently leased at market or is partially vacant, then the current value is likely well below the stabilized value. The difference between the two is the lease up which should include profit for your efforts in getting it stabilized.
Rental Property Investor · Houston, TX · Member since 2019 · 184 posts · 147 votes
3y
@Matthew Cope the appraiser basically performed an ARV (After Repair Value) Appraisal. Just remember the bank will only lend you up to 75% of the ARV (I would do 70% to be conservative). This should cover your contract cost plus rehab cost. Anything outside of the 70%, you will have to come out of pocket and you most likely be asked to bring it closing. So negotiate the price for sure and make sure. Tell the seller this is the ARV but to get there we have to put so much money into it. Feel free to PM me if you have additional questions. Best of Luck!
Investor · Nixa, MO · Member since 2016 · 20 posts · 14 votes
3y
Thank you for all of the replies. This confirms what I was thinking. When we began targeting this property, it was because I believed there was a value add opportunity and that was confirmed when we received the T-12 and rent roll. It surprised me that an appraisal company, that focuses on commercial properties, would use pro-form instead of current values.
I spoke with a couple local commercial lenders and they expressed everything that is being said here. Their appraisal will look at current values not pro-forma. This gives me some ammo, backed by numbers, to take to the owner.