AMA - What Do I Do With A Bad Appraisal

Today is another AMA episode,

Hayden from Atlanta asks:

I received an appraisal which in my opinion does not reflect an accurate picture of the property value. The comparable properties listed in the report include agricultural land with zero entitlements, versus my property which already is zoned for development, is fully paved and has 46,000 SF of buildings on it. The appraiser ultimately ignored the comparable properties and used an income multiple approach. But the cap rate he chose was a national average which does not reflect the local market conditions in South Florida. I understand that the appraisal process must be independent so that the bank can have an objective view of valuation. But this one is out to lunch. What do you recommend?

Hayden,

This is a great question. Unfortunately, this type of situation is far more common than you might think. Fortunately, it sounds like the errors are pretty grave. The most difficult situation to correct is the appraisal that’s only a few percentage points off. This one sounds like it’s way off.

You are completely correct in saying that the appraisal must be independent and you can’t be seen as directing or otherwise tainting the appraisal.

You want to keep the communication to the appraiser through the lender and under no circumstances should you communicate directly with the appraiser.

If you can get a hold of a market study for your submarket, you may be able to ask the lender to direct the appraiser to narrow their radius and use local data and not national averages which are not meaningful. A third party market study should align with the appraisal quite closely. By showing the lender that the market study and the appraisal are far apart, you can likely convince the lender that there is a problem with the appraisal. The lender can have a dialog with the appraiser, but you can’t.

I had a recent situation earlier this year where just like in your situation, the appraiser used five properties in their comparison. Three of the properties were not good comps at all and like you, compared land that was zoned agricultural with land that was zoned for development. When we replaced the bad comps with relevant comps, the picture changed considerably.

Finally, you can research who are the best commercial appraisers in the submarket and provide a list of three to the bank, asking them to choose a new appraiser. This will requires paying for a new appraisal, and it could delay the closing date.

If you need to delay the closing, you can often negotiate an extension with the seller by offering them an increase in the earnest money deposit, along with a daily interest charge for every day that the closing is delayed past the original closing date. The purpose of the daily interest is to cover the holding cost for the seller so that they don’t incur any losses as a result of the delay in closing. It shows the seller that you’re serious about closing and you should let them know that the cause of the delay was out of your hands.

These types of situations are incredibly common and have to be handled very delicately. Sometimes a bad appraisal can taint a loan approval. I’ve had situations in the past when a bad appraisal meant abandoning a lender and starting fresh to get a new loan approval from a brand new lender and a completely new appraisal.