Appraisers' Free Forum

Our medical office is located at a not so good area (Fort Pierce of St. Lucie County). Since there is no recent sales, the appraiser used past sales of St. Lucie west for comparison. St. Lucie West is considered to be the center and good/crowded area of St. Lucie County. We didn't choose that St. Lucie west because of the high rent, price and traffic. Because the appraiser used the St. Lucie west as a comp, the seller expects us to pay the downtown price for a condo located in a not so good area. I found it strange that appraiser can use past sales from a hot area as a comp for a "cold" area. Any advice?

LingLing wrote:Our medical office is located at a not so good area (Fort Pierce of St. Lucie County). Since there is no recent sales, the appraiser used past sales of St. Lucie west for comparison. St. Lucie West is considered to be the center and good/crowded area of St. Lucie County. We didn't choose that St. Lucie west because of the high rent, price and traffic. Because the appraiser used the St. Lucie west as a comp, the seller expects us to pay the downtown price for a condo located in a not so good area. I found it strange that appraiser can use past sales from a hot area as a comp for a "cold" area. Any advice?

My bolds Ling Ling, Obviously, the appraiser had to isolate comparable sales, and since there weren't any in the immediate area, had to go to the area you identifed. But, there also should have been negative adjustments that would reflect the differences in the current market conditions.

am trying to digest the "seller expects us to pay the downtown price for a condo" statement, and it raises a question for you: Who was the client for the appraiser, because it almost reads as if the client was the seller. There is always the option of getting a different appraisal completely, however, if the sales are so limited, you might end up with the same scenario, is my guess.

Hope this gets your question back into the limelight... and Good luck with your endeavor.

I'd say point out those problems you just stated, and seek a second opinion. Or... just walk from this deal and find one that's more reasonable.
Why do you want the lesser area though? Just some personal experience here, but I've seen people's business fail because they chose a location that is $1.25/SF cheaper. If they had chosen the better location, they would have had more business than they could tolerate. Commercial is about numbers, how much traffic can you generate to your business? The more, the merrier.

Thank you very much for your quick response. Well. Why we chose to locate our practice in the city of Fort Pierce? Good question. My husband is a surgeon and he wants to locate his practice right in front of a major local hospital. When we moved from California, this is the only hospital that doesn't have a surgeon with his specialty (now we know why). He rushed into renting this office space without too much research and rent negotiation. We relied on a local medical office management company that didn't tell us about the city. I was mad at my husband's decision but he is already locked in for 5 yr lease. I should say the local hospital administration has also welcome him with an open arm. His business is doing well and people driving from very far away to see him because of his skills. Now the landlord wants to sell his condo to him. Maybe I am being unreasonable. I just don't think we should pay the price that is calculated based upon another city. I think no past sales and high vacancy rate should be calculated into FMV. Yes. One of your answers is right. I found another appraiser who told me that he can't find any recent sales in the area and will have to use the hot area as the comparison. We may have to wait until there is a recent sale.

LingLing, when there are no current sales in the immediate area the appraiser has three basic choices for the sales comparison approach to value. The first choice is to go back further in time and use older sales. The second choice is to search further away or to expand the area. The third choice is to use sales that are not very similar to the subject property.

If the comparable property is an older sale, then the price of the comparable is adjusted for market conditions. This has the effect of bringing it to cash equivalency for the current market (or time). If the property is from a different area, the price is adjusted for differences in the location. If the property is dissimilar to the subject then it is adjusted for these physical differences. Sometimes comparable sales are adjusted for all of these factors.

As another poster already stated, there should be a negative adjustment to the sale price of a comparable from a better area so that it becomes equivalent to a property in your area. By itself, the use of these comps does not indicate a faulty appraisal nor does it necessarily mean you will be paying the price for that other area.

In addition to the sales comparison approach, appraisers can also use a cost approach and an income approach. Sometimes value indications from one of these other approaches will be a better indication of market value, but usually only if the property is new construction (cost approach) or an income property being purchased for investment (income approach). In your case, because the property is rented, the income approach might be helpful.

If you were the appraiser's client, you can ask about these things and the appraiser should be willing to discuss his or her analysis. If the seller was the client, the appraiser cannot discuss the appraisal with you unless the seller agrees to that.

One option might be for you to hire your own appraiser. Note that the appraiser should come to an unbiased opinion of value and should not try to push the value lower for your benefit. Another option might be to have the first appraisal reviewed.

Hope this is helpful. Good luck.

Ron Paul, thank you very much. I learned a lot.

LingLing wrote:Ron Paul, thank you very much. I learned a lot.

FYI, LingLing, I am Steve Owen. Ron Paul (quoted signature line) is a Republican candidate for President.

Go here to check him out...

http://en.wikipedia.org/wiki/Ron_Paul

...and here if you want to get involved.

http://www.ronpaul2008.com/

Ah, I see now why the choice for the location. That may be why the seller is pushing you, he/she thinks they've got you over the barrel. Also, you need to learn a bit about the brokerage end. The medical office management company's job is to try to get the building leased... they are actually working for the landlord. Unless you hired a broker to represent you, the broker works for the seller/landlord.

But about the appraisal... in a case where the sales data is poor at best, I'd rely more heavily on the income and cost approaches. I agree with the others that sales can be found, you just have to go further back in time. I don't know why some appraisers are scared to go back for 2, 3, or 4 years for sales data. I guess it falls back on their years of residential training where Fannie/Freddie has made it sound like it's the Golden Rule to not exceed 6 months. However, a time adjustment is easy to prove, and it's much better to use older sales with a time adjustment than to go to a different and superior city.

Steve Owen wrote:

LingLing wrote:Ron Paul, thank you very much. I learned a lot.

FYI, LingLing, I am Steve Owen. Ron Paul (quoted signature line) is a Republican candidate for President.

Go here to check him out...

http://en.wikipedia.org/wiki/Ron_Paul

...and here if you want to get involved.

http://www.ronpaul2008.com/

Thanks.

M L wrote:Ah, I see now why the choice for the location. That may be why the seller is pushing you, he/she thinks they've got you over the barrel. Also, you need to learn a bit about the brokerage end. The medical office management company's job is to try to get the building leased... they are actually working for the landlord. Unless you hired a broker to represent you, the broker works for the seller/landlord.

But about the appraisal... in a case where the sales data is poor at best, I'd rely more heavily on the income and cost approaches. I agree with the others that sales can be found, you just have to go further back in time. I don't know why some appraisers are scared to go back for 2, 3, or 4 years for sales data. I guess it falls back on their years of residential training where Fannie/Freddie has made it sound like it's the Golden Rule to not exceed 6 months. However, a time adjustment is easy to prove, and it's much better to use older sales with a time adjustment than to go to a different and superior city.

Yes. You are right. They know they got him. May I ask the appraiser I hired to use the data that go back for more than 6 months? Will the appraiser accept the request?

Try having a sit down "talk it out" session. In your post you appear to be very, very reasonable, and a professional appraiser would be willing to discuss the case in a non-confrontational manner. You may gain some insight as to the appraiser's analysis, reasoning, and opinions. But the appraiser should also be willing to consider your input and concerns. No one is perfect, and one of the problems in real estate is that we can only use the data that's available, even if it's poor supporting data. That's one reason why we use multiple approaches. However, in the end it is a professional opinion.

M L wrote:Try having a sit down "talk it out" session. In your post you appear to be very, very reasonable, and a professional appraiser would be willing to discuss the case in a non-confrontational manner. You may gain some insight as to the appraiser's analysis, reasoning, and opinions. But the appraiser should also be willing to consider your input and concerns. No one is perfect, and one of the problems in real estate is that we can only use the data that's available, even if it's poor supporting data. That's one reason why we use multiple approaches. However, in the end it is a professional opinion.

ML,

I agree with your statement, but don't forget to tell Ling Ling about our confidentiality rule. Some appraisers for some reason follow the automatic trigger portion of that thing. Her situation really demonstrates the imperative to rid the profession of that part of the ethics rule, but for some obscure reason apparently related to systemic paralysis it is still there. The appraiser may not be or feel free to discuss this matter.

Ling Ling, you are getting a good education here. If you can get the appraiser to talk to you, do so. If you can somehow get his appraisal reviewed, do so. But, it sure sounds like you shouldn't buy this thing. We have experienced some problems in our profession with people who appraise for some reason other than telling the truth, and I am told your area may have a particularly large concentration of these sorts of appraisers.

At a minimum get a second opinion from somebody with a sterling reputation in appraising. Do not shop for cheap and fast appraisers.

ML and Edd, Thank you. I actually reviewed the seller the appraisal. In the appraisal, the appraiser wrote that the cost and income approaches to value are not motivating factors. Therefore, only Sales Comparison is valid. Then he used the past sales in another city that is 20 miles away from us and has a booming downtown and high income population.

I don't plan to talk to seller's appraiser. I plan to hire our own appraiser. But before I hire him, I would like to know whether he will use all approaches suggested here 1. Sales Comparison. If there is no recent sale in the city, use the most recent possible, do time adjust. 2. Cost approach. 3. Income approach. Am I too demanding? Is my request reasonable?

LingLing,

The appraiser that you select will likely not know which approaches apply until he starts solving the problem. If the market is made up of people who buy commercial properties in order to occupy them and prosecute a business, then the sales comparison approach will be the one which gets most weight, given sufficient sales data.

If there are a preponderance of investors who are buying commercial property in hopes of deriving future benefits from market appreciation (as opposed to rental income), then the income approach may not be very useful. This happened in many areas of the California markets; landlords were charging rents which wouldn't even amortize a loan, because they were anticipating selling their rental house in a year or two for 25% to 50% gains.

The comment which follows may derail this thread, but we can always split it into a new thread: Personally, I don't think the cost approach says anything about market prices. We use it because a preponderance of our peers do so. And you'll see some disagreement with this position in the responses which follow. Still, I don't think the cost of production, even depreciated, has a damned thing to do with market value for a number of reasons. But there's lots of disagreement among appraisers on this subject.

LingLing wrote:ML and Edd, Thank you. I actually reviewed the seller the appraisal. In the appraisal, the appraiser wrote that the cost and income approaches to value are not motivating factors. Therefore, only Sales Comparison is valid. Then he used the past sales in another city that is 20 miles away from us and has a booming downtown and high income population.

I don't plan to talk to seller's appraiser. I plan to hire our own appraiser. But before I hire him, I would like to know whether he will use all approaches suggested here 1. Sales Comparison. If there is no recent sale in the city, use the most recent possible, do time adjust. 2. Cost approach. 3. Income approach. Am I too demanding? Is my request reasonable?

Well, you will get a lot of debate over the cost approach and its usefulness, but your appraiser should definitely be using the income approach, if it is income property he is appraising. I would suggest, if you want the cost approach, you ask for it alone and before the appraiser works out the other approaches if you want to see something with some possible relevancy. Then your appraiser can complete the approaches.

You are the client and you have a large input into the contents of the appraisal you order. Discuss this cost approach business with an appraiser who knows your area, is a reputable person, and is willing to tell you the strong and weak points of the cost approach for the property under consideration. There are several arguments agains the cost approach. 1. It doesn't reflect the market becasue most buyers, for one reason or another, do not consider building something like what they are thinking about buying. 2. The depreciation used in caculating the cost approach is based on a completely subjective estimate or is taken from the Sales Approach, so the approach is not independent or reliable. 3. Cost of construction data is hard to come by and construction materials and techniques are in constant change. 4. If your area is built up, it is impossible to build something without tearing something down. These arguments can approach hurrican force within the appraisal profession, but we haven't really figured it out completely yet and there is , in my opinion, some residual value in the cost approach, if only when done as independently as possible for a check on the other two approaches.

There have got to be some good appraisers in your area. Get one, pay him well and listen to him.

Be sure to get somebody who knows what he is doing and pay him well for doing it. From what you are saying, rents should be substantially lower in your area and that is good support for ans obligatory location adjustment agins those comps in the hgih rent district.

Have you consulted with someone about buying this thing as alternative to breaking the lease? Why do you want to own it?