All Forum Posts by: H. Jack Miller

I looked at a loan request today. I know the area very well in Philadelphia, without seeing anything my first thought was the property was worth 350k or so. The appraisal came in at 640k, the comps they used were out of the area, in much better areas, much better condition and really no comparison at all. Philadelphia is a city of neighborhoods where each has its own personality and values. They are not alike in terms of values. This appraisal was a joke. I feel bad for the lender who believes this.

What is your experience with appraisals?

 Nope. Particularly in urban areas. Values can change dramatically within tiny distances in a city. Appraised value is going to look at comparable based on distance...while the market may value 2 properties, literally across the street from each other differently by hundreds of thousands of dollars.

Investors for decades that do cash out refinances, or BRRRR as we now call them, have known this for decades. Its why we buy on the edge of certain neighborhoods, because we know it will appraise dramatically higher than its market value...thus allowing us to cash out much more money on the property.

 Yes Philly is a city of neighborhoods and one block can make a giant difference as well a lot of streets there were low value are being redone and very desirable 

For commercial properties, we require appraisals performed by appraisers holding MAI designation.  For the rare residential deal we entertain, we require either MAI or SRA designation.  This tends to eliminate appraiser incompetence and requires adherence to guidelines set by the Appraisal Institute.  Yes, we still sometimes end up with appraisals that are significantly “off”, but, those tend to be “off” by lesser amounts and most are at least somewhat reliable.  The appraisals that are submitted to us by borrowers “hoping” we will accept them are often performed by “state licensed” appraiser who do not hold the MAI designation.  The borrowers pay significantly less for those appraisals; they usually lack vital information, tend to be performed to much more “lax” standards, and often lack good decision making as to comps, capitalization rates, and adjustments of value between the subject property and the comps.  

The “worst” appraisals I’ve seen (on a consistent basis) as to over valuation are on non operational health care facilities.  Even the valuation of these by MAI appraisers value them at something like double their average sale value.  Everybody and his brother (or her sister) obtains a purchase contract for a shuttered nursing home that once had an appraised value of $10 million; has a current appraised value of $5 million, and the investor has it under contract for $2 million.  But the facility is obsolete so that no self pay patient or insured patient would live there.  Therefore, the only patients a nursing home like this could get is state Medicare, which does not pay enough to cover anything other than MARGINAL costs.  The investors all are going to turn it into something else - low income housing , student dorms, self storage, transient housing, drug treatment, etc.  somehow this almost never works out; eventually the property sells for something close to land value.  

I’ve also seen some pretty severe UNDER valuation in appraisals.  This tends to occur when the appraiser is unfamiliar with the area, and the area has had a recent rapid increase in property value.