We are finalizing a refinance of our business/property and as part of the process we had to get a appraisal done. How accurate do you guys think those are in terms of what a business should be sold/purchased for in the open market?
Appraisal On Tunnel Car Wash - Accurate or Not?
- Thread starter hkim310
- Start date
Who did the appraisal? Did the bank send one or did you pick one? Appraisals done sent by a bank appraisals are usually low because the banks want to loan as little as possible for their own security. There is also a problem with outside appraisers. Car washes are a tricky business to get appraised. If you can't find one that has appraised car washes before you may not get the best appraisal of your wash.
The bank asked an outside appraisal company to perform the appraisal. Supposedly, this appraisal company has done appraisals for car washes in the past (they had stated they had done 2 other car washes). I actually asked the appraisal company for the appraisal total but was told that I would need to get approval from the bank to disclose the information which I thought was funny as we are the ones that is actually paying to have the appraisal performed. I will contact the POC at the bank after closing to get the appraisal total.
Waxman
Super Moderator
there are good and bad commercial appraisers like everything else. i'd request a copy of the appraisal through the bank, or ask their ok and then contact appraiser once you have it. once in hand, do your own due diligence. check the comps they used and prove whether or not they are valid ( similar wash, similar income area). see what other data used to determine the value. how much value is given for land, buildings and improvements? how does value of buildings and improvements compare to your own depreciation on your most recent tax return?
that's enough to get you started but you get my point; something like this if you don't check the data yourself you have to 'believe' whatever they tell you.
that's enough to get you started but you get my point; something like this if you don't check the data yourself you have to 'believe' whatever they tell you.
When this refinance is complete, I plan on requesting the appraisal through the bank. I do wonder how they were able to find a comparable property as there are no other similar car washes within a 35 mile radius of our property. I also am curious how they come up with the cap rate. When talking with the appraiser, he had stated that they divide the average of 3 years of Ordinary Business Income + Rent by the cap rate to come up with the appraisal value. He had stated that the cap rate could be 10% and is based on risk involved with management, and business in general. Is this some arbitrary number that they just make up?
Waxman
Super Moderator
i have mixed feelings about using a commercial appraisal to estimate value when selling. i view an appraisal as more of a method a bank uses to minimize their risk ( loan to value). if i felt the appraisal was lower than i wanted to sell for, i would give it less importance from my own standpoint. of course a bank is often involved in financing for a new owner when you sell, but not always. say for example you sell to Taco Bell. they want to demo the wash and start fresh. any car wash appraisal is invalid with this type buyer, so i guess i'm saying the appraisal may contain some useful data, but any business is worth today what a buyer will pay for it today. same with a car, apartment building, etc.
getnbusy
Active member
Hkim I would ask my loan officer for the complete appraisal before I closed on anything. If you pay for it, it's yours. The appraiser may not give it to you, but the bank has to. It may be worth more (or less) than you think. If more, and the numbers work, you might be leavin money on the table. Or, if you don't wish to borrow the extra money, you could argue for a lower rate since the loan to value will be less.
robert roman
Bob Roman
Appraisal is an estimate of market value based on conditions and data available at the time of the estimate.
Accuracy is based on premise that perfect data would provide perfect results.
For example, the marketing period of most commercial appraisals is 12 months.
So, an appraisal that is two years old would not be considered accurate because the conditions and data used in the estimate of market value are not current.
However, an appraisal is always somewhat subjective due to the human factor and the data is never perfect.
Consequently, an appraisal should be used to complement but not substitute for investment analysis.
For example, the goal of calculation of value (i.e. broker’s or consultant’s opinion of value) is to determine a price or “price range” that result in a change of ownership.
This is quite different from the purpose for summary appraisal report.
Accuracy is based on premise that perfect data would provide perfect results.
For example, the marketing period of most commercial appraisals is 12 months.
So, an appraisal that is two years old would not be considered accurate because the conditions and data used in the estimate of market value are not current.
However, an appraisal is always somewhat subjective due to the human factor and the data is never perfect.
Consequently, an appraisal should be used to complement but not substitute for investment analysis.
For example, the goal of calculation of value (i.e. broker’s or consultant’s opinion of value) is to determine a price or “price range” that result in a change of ownership.
This is quite different from the purpose for summary appraisal report.
robert roman
Bob Roman
“….appraiser stated divide average of 3 years of Ordinary Business Income + Rent by the cap rate to come up with the appraisal value…..”
This is a technique used in one method of the income approach to value.
Income approach methods include gross income multiplier, capitalization, discount cash flow analysis (estimating reversion values), highest/best use analysis and mortgage equity capitalization.
Generally speaking, capitalization rate would be applied against the 3-year weighted average (not the mean or arithmetic average) available cash flow (NOI) where the most recent results carry greater weight in the 3-year span.
“…..cap rate could be 10% and is based on risk involved with management, and business in general. Is this some arbitrary number that they just make up?”
No, but it is somewhat subjective.
For example, cap rates are affected by increases in supply and demand and interest rates.
So, if my anticipation of these factors is different from another person’s, our opinions of value may be different.
Higher cap rates (lower property values) tend to be brought about if owner is unable to remain to transition the business, if facilities require significant capital investment, and other conditions.
Lower cap rates (higher property values) tend to be brought about if there are significant barriers to entry, history of increasing earnings, attractive environment, etc.
This is a technique used in one method of the income approach to value.
Income approach methods include gross income multiplier, capitalization, discount cash flow analysis (estimating reversion values), highest/best use analysis and mortgage equity capitalization.
Generally speaking, capitalization rate would be applied against the 3-year weighted average (not the mean or arithmetic average) available cash flow (NOI) where the most recent results carry greater weight in the 3-year span.
“…..cap rate could be 10% and is based on risk involved with management, and business in general. Is this some arbitrary number that they just make up?”
No, but it is somewhat subjective.
For example, cap rates are affected by increases in supply and demand and interest rates.
So, if my anticipation of these factors is different from another person’s, our opinions of value may be different.
Higher cap rates (lower property values) tend to be brought about if owner is unable to remain to transition the business, if facilities require significant capital investment, and other conditions.
Lower cap rates (higher property values) tend to be brought about if there are significant barriers to entry, history of increasing earnings, attractive environment, etc.
Thanks for the concern Getnbusy, but this is for a refinance of an existing loan. I will definitely ask my POC at the bank for the full appraisal report upon closing. Robert Roman, everything you say about the lower cap rate is what I believe this property/business possesses. This is partially why I think the cap rate that is set is an arbitrary number because it varies depending on who is performing the appraisal and is not somewhat subjective, it is totally subjective.
