Appraising a Car Wash - Cost Approach?!

[Red Baron]

A bank had my car wash appraised for a new loan. The appraiser insisted that using Cost Approach is the only acceptable way. Of course the value using Income Approach is much higher, but the appraiser refuses to use Income Approach. The 2 times I've had it appraised before, the Income Approach was used. This is in Texas. What are your thoughts on this?

 

[bighead]

If you listen to Warren Buffett, or any other financial guy, they will tell you a business is worth the present value of future free cash flows. Period. If this guy isn't willing to go there, then find a different guy, and if the bank isn't willing to do that, then find a different bank.

 

[Red Baron]

Yeah I don't know what gives, I've had 5 car washes appraised over the years and not once did the apraiser rely totally on Cost Approach.

 

[Greg Pack]

Years ago I challende a guy on that. He quickly informed me he was a property appraiser, not a business appraiser. That might be part of the problem.

Having said that, there are quite a few carwashes here that aren't selling for their original equipment costs.

 

[Red Baron]

Ok some new info. I found an appraisal from 2004 where this same appraiser appraised another car wash I once owned, and in his appraisal he wrote: "When car wash facilities do sell, the business enterprise is also included. Separating the the cost attributable to the real estate and the business enterprise is difficult, if not impossible."

This contradicts what he's saying now, which is the a Cost Approach should be used, not an Income Approach. Sure seems like the guy is all over the ballpark.

 

[rzeavy]

A true value of a profitable car wash is a combination of real estate (land and building) with gross revenues (minus expenses).This will allow the bank to asses your ability to service the debit.
If the car wash is not profitable, then the value of the land should be the value of this property (regardless of building value), since the bank will asses this property to have a better use with a different business on it.
In my case I had three SBA loans based on the value of the land plus future earnings to being able to receive a construction loan for the car wash.

 

[Jimmy Buffett]

I suspect this has more to do with a serious shift in the appraisal business than a change in the car wash business. Appraisers are as much too conservative now as they were too liberal before. The whole lending world has been turned upside down. I can hardly imagine how hard it must be to get a loan for a new project. One would think banks would be looking for a proven track record but it's rare to find a banker that actually thinks.

 

[Earl Weiss]

QUOTE=Red Baron;51100]A bank had my car wash appraised for a new loan. The appraiser insisted that using Cost Approach is the only acceptable way. Of course the value using Income Approach is much higher, but the appraiser refuses to use Income Approach. The 2 times I've had it appraised before, the Income Approach was used. This is in Texas. What are your thoughts on this?[/QUOTE]

Seen lots of appraisals. They typicaly use 3 valuations: Cost, Income, and market. It should be up to the lender to determine which of the three valuations they wish to loan you $ on.

Now, as posted above, lending parameters have changed dramaticaly in the last couple years. Most businesses whose loans go into default have trashed the business value by that point.

 

[rph9168]

From my experience you really have to shop banks to see what type of terms they will give you and based on what type of appraisal. Some banks have been burned pretty bad and in most cases these banks will only lend on the basis of the value of the property if at all. Some may have had a better experience or are in a position to be a little more lenient on the terms or appraisal.

Surprisingly many don't consider how solid the person seeking the loan unless they have a bad credit history. I had a customer with a 785 credit rating willing to put down 35% and the property that was turned down about a year ago.

 

[cebo]

It depends on what type of value the bank is asking for. If they want a value opinion on the real estate the Cost Approach would probably be the only applicable approach since it is a special purpose property. To do an income approach you would have to find washes that are leased to someone and do not take into account gross income / expenses. Similar to if you were leasing a single tenant building. If you find sales of similar washes the going concern will be reflected in the sales price so you probably couldn't do a direct sales comparison. If you were to value the going concern then you would capitlize the net income of the wash. Banks were fine with this until the economy hit the skids. My gross is down about 35% from from 2007 so guess what happened to the value. I don't think credit would be at the top of the list in our current situation. I think the banking relationship and past performance would be more important, but alot of bankers don't think too good. The bank is probably concerned what they can get from you in the event of a default. If they are loaning on a going concern they are gambling mostly on how well you can manage the wash. Bad washes are a mess all over central Alabama. I know of one situation where the owner spent 550K to build a wash in a very small town and it never averaged over 4K or 5K a month. It's blocked off and been for sale a while. I guess Pat Crowe is having his 3.5 x gross revenge from back in the day.

 

[bigleo48]

If you build a $10 million car wash on the top of Mount Everest and nobody can access it...is it still worth $10 million? Not likely...

Now I do believe you need to take the cost into account as not all car washes are created equal. But ROI would be my biggest concern.

 

[cebo]

The example I gave of the small town wash proves this. The equipment seller sold the guy a bill of goods. They estimated this wash would do between 8k-10k per month. Any experienced operator in our area knew this was a load of BS. Guess that's why he sued and got some cash back but is still in the hole. This is also why the Cost Approach is the least reliable Approach to value. A cost approach on Mt. Everest would be reasonably accurate if functional depreciation was applied correctly but there would not be enough data to determine accurate depreciation the same way you could not accurately determine physcal depreciation on an old wash. Someone would have to pull a proforma out of their butt for a new wash in this location. My point is, lender's as a rule do not manage REO properties very well and many times make lending decisions on the prevailing winds which suck right now. Therefore limited loans on risky properties. Glad I locked in when things were good. The question does not give enough detail to determine an answer. The appraiser's scope of work would be determined by the value the lender wanted who by the way is renting you his or someone else's money. That means they make the rules.

 

[cebo]

big leo, I know what you are saying but most lender's lack common sense. If you are lending on a purchase how do you know how well the buyer will manage it? 15 yrs ago my old 4 bay SS across from Walmart was doing more than a new 4 bay 4 miles down the road. The new Wm superstore move right behind him and my gross went out of sight due to less traffic congestion and his stayed about the same due to a lack of access. His was newer, looked better but mine was cleaner with more options. If I had of sold to a slacker the bank would have taken a hit. A wash is a risky loan especially on a purchase.

 

[Red Baron]

I suspect that a very small percentage of successful car washes are sold using a Cost Approach alone. I've bought, built, and sold car wash 8 times and not oce was a Cost Approach alone used.

The economy and tighter banking regulations do not get to suspend common sense. What was common sense in 2004 is still copmmon sense today. By that I mean that the same appraiser appraised a car wash in 2004 that I was later to buy. In his appraisal his exact words were: "When car wash facilities do sell, the business enterprise is also included. Separating the the cost attributable to the real estate and the business enterprise is difficult, if not impossible."

Maybe banking regulations have changed, but his statement above did not suddenly not apply now that the economy is tighter.

 

[bigleo48]

A wash is a risky loan especially on a purchase.

Yes, unless its a proven site when you sell it.

Banks hate these high capital cost, single purpose buildings/businesses.

 

[Earl Weiss]

The economy and tighter banking regulations do not get to suspend common sense. What was common sense in 2004 is still copmmon sense today. By that I mean that the same appraiser appraised a car wash in 2004 that I was later to buy. In his appraisal his exact words were: "When car wash facilities do sell, the business enterprise is also included. Separating the the cost attributable to the real estate and the business enterprise is difficult, if not impossible."

Maybe banking regulations have changed, but his statement above did not suddenly not apply now that the economy is tighter.

The difference is that the OP was with regard to an appraisal for loan puproses. You are targeting appraisal for sale / purchase.

Common sense dicates a different approach.

 

[cebo]

We've been kicking this question around on here for over 10 yrs. I've never thought any market provided enought data to do a "real estate" appraisal on a wash. It's hard to seperate them out, but if you do a business appraisal the cost approach would more than likely not be applicable. If the cost approach is inline with the income approach I would bet the wash is either in an overbuilt area and/or not run very well. Even a proven site is a risk based on management. Trying to be vague on purpose, 3 washes in the metro area near me sold to a retired financial executive (who probably thought he could stop by and pick up the cash) that promptly drove the gross down by over 50%. The lender took over and now 3 washes with a cost approach of 2-3 million have an income approach of less than 500K. As a real estate investor I've figured out that equity doesn't mean $hit. Cash is king. I'm just hoping for a good pollen season.

 

[robert roman]

Since most banks rely on a short-list of preferred appraisal companies, my thought is that the appraiser is most likely following marching orders issued from the bank regarding method to value.

My other thought is that many lenders are skittish on retail uses in general.

For example, Lubbock has a low unemployment rate but employment growth is lagging compared to the other major Texas metro areas and home values and retail sales tax are nearly flat. Moreover, you have a cotton crop that is heavily dependent on the weather.

If I were a banker, I would not be particularly excited about taking on a lot of risk lending money for retail in this environment.

Otherwise, it is difficult to speculate further because you have not mentioned what the purpose of the loan is or the conditions and terms you are trying to obtain.

 

[pitzerwm]

Today, I believe there is a law about the banks using "their appraisers".

There is a possibility that the banks still tell them what they want so that the loan won't fly.