Most Private Lenders always require an appraisal in order to determine the current market value. They do this because they want to protect their investment and to ensure that they are not “over investing” with the loan by putting up more money than the commercial property is worth. They also want to know the potential value in case they have to foreclosure on, repossess, and resell the property later.




Who Pays for the Appraisal?




Borrowers must pay for the appraisal even though its purpose is to protect the lender, and the report is usually sent directly to the lender.




Cost and Time




The cost of a commercial appraisal depends on property-type and location. The appraisal process usually takes anywhere from 3 to 10 business days.




Determining Property Value




In general, there are three different methods to determinate value






	
Sales Comparation 






The appraiser finds similar properties, usually located within a three-mile radius of the subject property, that have sold recently (90 to 120 days.)






	
Income Capitalization






The appraiser uses a valuation method to estimate the value of the income-producing property. It is based on the expectation of future income. If the property brings-in more income it is expected to worth more, and the capitalization approach helps to determine how much.






	
Replacement Cost






The cost approach estimates the value of a property by adding to the land value and the replacement cost of the building, less the depreciation. The replacement cost of improvements is the cost to replace an improvement with another improvement having the same utility.




What happens with a Low Appraisal?




Borrower could have few options if the appraisal comes in low






	
They can include in their offer contract a contingency that requires that the property be valued at the selling price or higher. 








	
Borrower may try to negotiate with the seller to reduce the sales price.








	
Another alternative might be to put more money down to cover the difference between the appraised value and the sales price.








	
Also, the borrower can always dispute the appraisal. Find out what comparable sales were used and ask if they're appropriate. 






Have a question?




Please give us a call at 956.928.1111 or email us at invest@capitalinsiders.financial




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