Appraisal Matters

A property where supply is so low yet demand always seems to remain high has no downside, right? Guess again.

Ironically, unless they are trophy properties, they are frequently more difficult to sell.  Conventional financing vehicles, which often represent the vast majority of potential financing available, do not work because the properties usually don’t "appraise" for the transaction amount. It’s not poor judgment on the appraiser’s part - there are just so few or no comparables to use in benchmarking a market value.  In most cases not even a listing is available to serve as a guideline.  The appraiser is forced to rely on other valuation techniques and they typically result in a lower market value conclusion than the transactional amount. There’s nothing wrong here - it’s just a lack of data.

Lastly, some conventional lenders require certain approaches to value and if the sales comparison cannot be use due to a lack of comparables, they may not have a sufficient comfort level to make the loan - at least under the original loan terms.

Because appraisers have so few or no comparables to use, so how do they justify the “only transaction” and its uniqueness? This makes them more difficult to finance with conventional lenders and much more cash down is needed, so even properties with far more demand than supply can be atypically difficult to transact.

John Simpson, MAI