All Forum Posts by: Isadore Nelson

You are wasting your time. This property will require about 45% down to hit the 1.25 DSCR that is the median requirement for a commercial real estate loan.

If you want to be at that price point with that much for the downstroke, you need to be looking at higher risk properties with a higher cap rate. Or you need to adjust the price point down.

 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  But the facility is obsolete so that no self pay patient or insured patient would live there.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.  

Absolutely, that's what I am thinking as well. I think the money just does not mean that much to the seller, and he would rather allow a young investor like myself to get some solid footing. Obviously, I am going to be very, very diligent about getting all the documents necessary and looking over the area as we get farther into the process. 

Appraised value is a completely different metric than market value.

 Never take the value of an appraisal for face value. Review the comps, the location and the interiors compared to your property. We had one in Mass. recently where they overvalued the property which was in awful condition and compared it to homes in a cul de sac that were updated. It was a joke of an appraisal.

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?