Multi-Family Appraisal Sham?

22 Replies

Has anyone else found multi-family appraisals in your area to be essentially worthless? I know the banks require them but I have found them to be wholly lacking in credibility. We have under contract a 48 unit that in Oct of '12 was appraised at $1.9mil. I knew the assumptions were faulty and it wasn't worth that and we have it under contract for $1.685 mil. Now another appraisal by the same guy comes in at $1.7mil. I know the local market hasn't dropped by 11% and the property is functioning at the same level as in 2012. It seems to me they play to their audience and this time since he knew the purchase price he altered it to match the price. That doesn't seem show any integrity.

LOL, the appraisal was likely done by an MAI appraiser! MAI stands for "Made As Instructed"!

That's a joke, BTW.

Lots of reasons for the decrease in value. Multi family projects do not just continue to go up or appreciate with rents. In a short period of time inflation can decrease values more than the rise in rents, just one aspect. Labor and materials goes up, management and other expenses can increase, higher costs of deferred maintenance and repairs are deducted as adjustments. In a year you can have new competition in the market, a new project opens and perceived market influences can change vacancy expectations.

I'd think it's more of a matter of disappointment and not recognizing market changes that are used to evaluate a current estimate of value. Values are never static nor do the always increase. The larger the project or the higher the value the more the change in value becomes more significant at a point in time. :)

Appraisers will almost never put the value at more than the purchase price. In my experience they use the purchase price +5% as their ceiling. Why? I have no idea. Any appriasers on here that can answer that?

@Bill Gulley I understand what you're saying but inflation is nil, it's the same owner so the management has not changed (same owner/manager since 2006), the market competition is the same. The only difference is who's paying for the appraisal. The company that I use to manage and manages many properties in the market agrees with me that the market has not shifted 11% in one year.

If inflation was nil, the AFR set by the IRS would be zero.

There is also a difference in the "purpose" of the valuation. One done without a sale will usually be higher as the appraiser may begin with a broader range of comps and opportunity costs/cap rates.

When you get an appraisal for a sale transaction the value leans toward what the market will bear rather than as an asset in portfolio. The sale contract or agreed price begins the base line +/- as to comparable properties and cap rates expected as the it is to prove if the sale and market values are valid.

Which is why you'll usually not find an appraised estimate of market value much higher than the agreed contract price.

Might ask the appraiser how the property was valued, ask why the big change, most will justify what they did, how and why. :)

I can tell that I have seen a few commercial appraisers that are good and I have seen a few that are idiots.

Sometimes a bank on the loan is not local so they will use their in network appraiser for the whole state. They end up trying to find comps for an area they have no clue about and make all these adjustments that make no sense. They are not trying to do a bad job they just do not know what they need to versus a local commercial appraiser who understand that micro market and can appraise it more accurately.

I know value better because unlike some appraisers I talk to investors on a daily basis. I know what the sellers want to sell for and what the buyers want to purchase for. I request a copy of the appraisal because I want to know in the mind of the appraiser what value they are reaching for and how they are justifying it. When I used to do thousands of BPO's we had to defend our values all the time. I would get a request to clarify because they had a previous value at XX. When I saw the report it was laughable what they were using as comps and how far away.

I have seen appraisers before go for 1,300,000 and then when it was a short sale 6 months later drop it to 800,000. The financials changed a little bit but frankly the first appraisal was overinflated.

My experience has been as follows -

appraiser calls me and asks for the contract and all property info

then it magically appraises for exactly what it was in contract at

i think they are worthless and should just pay me for a BOV instead

We were very surprised to see the appraisal on a 60 unit come in at 300k over sale (23%) price, even though that is where we had valued it. What I found to be very strange was some of the justifications for the value. After going great lengths to show that the market cap for this type and age of property, he proceeded to use a 10 cap rate to justify his value. Magically his income approach number matched sales approach number.

He threw out the replacement cost as this is a 60s building and the value is way below replacement cost.

His extremely low insurance number (off by around 70%)showed that he wasn't keeping up with trends in the insurance industry. He did somehow come in with a 60% expense ratio on this all bill paid property.

I tend to feel that they guess what the value is and then find a way to justify the numbers.

I'm just a residential appraiser but from my perspective this profession gives one ample opportunity to piss people off; it's often a damned if you do, damned if you don't business. I just want to make a some points. First, unless the appraiser is an ***, which most aren't, they are trying to make your deal work. Second, you'd be surprised how accurate valuation techniques are sometime; usually they get you within +/-5% without ever seeing a sales contract. If the deal makes sense then a good appraiser will try to make it work. Finally, I don't know about commercial deals but in the residential market if your value comes in much higher than the purchase price it can stop your deal in its tracks because it's a big red flag. After the expense and delay of at least one more appraisal your deal can then move forward. I could wax on but those are a few points to consider. Oh yeah, I think requiring appraisals stinks but I can't think of another way to verify collateral which is one of the 4 C's of lending (capacity, capital, collateral, & credit). It reminds me of Churchill's famous quote: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time".

Very rarely have I seen appraisal come in over purchase price.

The sham in the title of this post reminds me of the shamwow guy.

Appraisals would be useful if they were blind, in that the appraiser didn't know the contract price. But, they aren't. As a result they generate a canned number that is supposed to be the independent validation of the transaction, providing no real value but adding considerable expense. It a corrupt process that carried a lot of blame in the 2008 real estate meltdown, and it hasn't been fixed.

Yeah, but could you imagine the expense of paying 3 or 5 appraisals so the bank could get a better picture?

Brett residential is more straight forward.

Commercial is a whole different Universe for evaluating properties.

The income approach is used with more weight than comparable sales. The worst BPO's I had to do in the past are a struggling hotel, mom and pop type owned businesses with limited info and comps, and mixed use type projects.

Those take up weeks sometimes to complete. Used to BPO's for commercial the mills stated they would pay 400. Now to get orders it's one to two hundred. I haven't completed BPO's in years. The BPO's almost resemble an appraisal and the appraisers would get 3,000 to 4,000 for the appraisal versus 200 for a BPO.

Wow. Quite the insight to how outsiders view my profession...

OP- Keep in mind that appraisals are nothing more than opinions of value. It sounds like one of the appraisers had their cap rate wrong/unsupported. If an appraiser does not specialize in that property type(which I do), its not surprising he got it wrong. It is near impossible to be an expert in every property type. I would suggest paying a little extra for an appraisal from a firm that specializes in multi-family for your future deals.

In regards to hitting numbers, I "rustle jimmies" on a monthly basis. I really don't care. The lending institution is my client and I am paid to help protect their interests, not yours.

I'm not an MAI yet but I will be by the end of the year. The newer MAIs have gone through extensive training, classes, college degrees and have spent significant time in the commercial arena. Please look at what it takes to receive the designation. Unfortunately, some of the older guys were grandfathered in when they gave the designation away.

On a lighter note, I read these boards daily and have learned so much from you guys. I'm getting closer to getting the capital I need to start investing in commercial property (multi-family & nursing homes). Joel, you in particular have been an inspiration to me. Thanks.

@christopher You missed the point. This was the same guy giving an appraisal on the same property that is in the same condition as 13 months previously in a market that if anything the prices are higher than 13 months ago. There is no way the value should be 11% less if this is supposed to be an accurate estimate of the value of the property. This is a guy that supposedly knows the local multifamily market.

@Dennis As Chris mentioned, an appraisal is an opinion, and opinions can change. There are some other sayings about opinions that I'm sure you've heard, but there are also a lot of factors that could cause his change in opinion. Odds are that he was just incorrect in his first appraisal like you stated, but he may have had new/better data in the second appraisal that just didn't support the original number.

In many cases, a contract price is the best indicator of value, assuming the agreement meets the definition of that type of value. If the property has been on the market the past 12 months at $1.9M with no other contracts, it's probably fair to say that $1.9M is too high. With the $1.685M is coming out of your pocket, you've probably done a fair amount of research on the property. Since the seller accepted your offer, it would suggest that he thought it was fair as well; otherwise, why would he leave that much money on the table?

It's probably safe to say that a purchaser or owner will know more about a specific property since most appraisers only get to visit a property once for a short time. Add that to the fact that an appraiser rarely receives all the information requested from the purchaser/owner and still has to meet a deadline, and the result involves a lot of guess work. I don't always aim to hit the contract price, but if it's supportable by market data, it's probably a good place to start. Most lenders only lend on the lower number out of the contract price and the appraised amount anyway.

We've all been wrong before, but a hard-headed appraiser who puts the same number every year despite the writing on the wall is not doing a good job either.

BTW, I'm pretty new to BP and appreciate all of your insight. I also find it interesting to see how others view appraisers. I'm not sure if my rambling helped anything, but I hope your deal works out.

@Jason I knew the property wasn't worth anythning close to the first appraisal but the problem comes when the seller and his agent uses a falacious appraisal to justify their price to an inexperienced buyer. This is the second property in a row I've run into this. The one we purchased in 2012 was appraised 6 months before we bought at $2.5 mil but it wasn't worth that and we finally convinced the buyer to sell at $2.25 mil. after much "education" of the seller. It makes a buyer's job harder to have to overcome these unrealistic appraisals.

@Dennis Tierney uneducated buyers or buyers with unrealistic expectations are definitely an obstacle, especially if they have a report to back-up their expectations. IMO a ~10% difference isn't terrible, although it isn't great (although it's astronomical when it's your extra $200-$300k), but who's to say that another investor wouldn't pay that?

Putting a single number on a property is a little flawed in itself when you factor in flexible/stubborn sellers, adequate/inadequate marketing, etc. but a single number is required by most lenders. In most cases, a range of values is more appropriate because there are a lot of variables that affect one buyer more or less than another.

I doubt your appraiser put a number on that property that he believed was wrong, although appraisers can often be too optimistic, and I doubt he enjoyed realizing that his previous appraisal was higher than what was offered after 12 months.

You definitely seem knowledgeable in your field, so you know as much as anyone that things are only "worth" what someone is willing to pay, and no appraisal, BPO, or other piece of paper can change that. We definitley don't determine the market, we just try to make educated predictions that should be supported by the market. That being said, there are a lot of sloppy, lazy, or incompetent people in any field, and appraising is not an exception. Hopefully, that appraiser isn't one of them, and his opinion was just "corrected" after realizing his flaws in the previous appraisal.

As for "always hitting the contract price," it often seems like that's the case, but for every deal of yours that goes through because the appraisal matched, there are others that don't go through (those people really hate appraisers). If all of your appraisals are matching your contract price, there's probably a good chance that you know what you're doing as well.

@Dennis - I'm sure you have figured this out by now but, if your NOI goes down (say due to taxes) so does the property value given the same cap rate.


1.8 Million at 5% cap rate = 90k NOI

1.7 Million at 5% cap rate = 85k NOI

Hope that helps!

I just had a multi family appraisal come back today 70k below current contract amount.  However there were 4 offers on this property significantly higher than the appraisal.  Can I use the other offers as evidenced that the property is worth much more than the appraiser suggest? Also advanced data such as rent per square foot and gross income multiplier are all with in norms for the area. Does anyone have any thoughts. Both seller and buyer agree comps are off.

I have a different perspective as a commercial real estate appraiser with an MAI designation.  It took years of education, experience, a CPA like two day exam, and a college dissertation type demonstration of knowledge sample report to obtain an MAI.  Within the MAI education program we are taught to support, research, and verify all data within the report.

In practice, that doesn't always happen and we all make mistakes (or get lazy)

A stabilized multifamily appraisal should be pretty straight forward with market rents, market expenses, and market derived cap rates.  If the appraiser is pulling all the data from the market (as required) the variance in reasonable value opinions should be low assuming the market has sufficient data.

If a MF property is not stabilized then the variance of values could be very high because the appraiser has to rely upon assumptions.  

The "hit the number" pressure is not nearly as bad as the residential side of the business.  From my personal experience as a commercial appraiser in my small part of the world, value pressure is very rare while on the residential side of the business the pressure is constant with nearly every assignment.

We consistently appraise properties both above and before the contract price because the contract price is not the value of the property (although it is one data point that an appraiser has to work with).

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