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Lending Rules Will Be Relaxed For Commercial Properties Under $500k

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NachoPerito

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Terrel L. Shields

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I cannot imagine how bad evaluations will be prepared by non-appraisers nor how risky this leaves a commercial loan portfolio.
 

hastalavista

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Looks like a done deal. US regulators won't require appraisals on commercial properties up to $500k in value.

I was looking at my own work for lending instutions. Over the past 24 months 9% of my work fell between the $250k to $500k range. So it will have some effect on my business.

https://www.reuters.com/article/us-...on-property-values-sources-idUSKBN1FF24R?il=0

Some effect? Yes. To what degree? That depends.
The de minimus isn't an automatic "get out of the appraisal-requirement jail-card for free" for institutions.
De minimus transactions still require evaluations; so some valuation-product are going to be needed. But, regardless and if the only change is a $500k level, then an appraisal is not necessary if:

A. There are no obvious/material changes in market conditions or physical aspects of the property;
B. There is no new monies extended (other than the cost to close the new loan);

The above are requirements... the below are labeled as "should" (i.e., the institution "should" follow these policies) but in the banking world, "should" from a regulator is "must". Appraisals "should" be ordered, regardless if the transaction amount is lower than $500k de minimus (now $250k) if:

C. The loan creates a combined loan-to-value ratio in excess of the supervisor (read: regulator) LTV limits;
D. The property is atypical;
E. The property is outside of the institutions traditional lending market;
F. The transaction involving existing extensions of credit pose a significant risk to the institution; and
G. The borrower has a high-risk profile.


Existing institutions can order an evaluation vs. an appraisal on an existing loan if no new monies are part of the transaction and there has been no material changes to the market or property.
They are advised (which my clients take as a "must") to order an appraisal despite the de minimus level if the property is atypical, the loan amount (in part or in combination) exceeds the LTV limits, the institution is pushing its risk-boundaries with what it already has on its books, it is out of their geographical lending-footprint, or if the borrower's risk profile is higher rather than average or lower.

You are in a good position to play compliance/risk officer with your last 24 months' of volume to some extent:
How many were not new loans, and were not atypical or did not experience any material changes to the property or to the market conditions?
Those are the ones that could flip to evaluations.
 

DREA Dean

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I looked at my spreadsheet of completed assignments, and like the OP, about 10 percent over the past two years were appraisals of properties with a value conclusion of under $500k. But, of those, quite a few were over $400k, with several above $450k. So, would the lender be confident going in that the value is under $500k?

I also appreciate the above post. Those additional hurdles would likely mean that very few of the appraisals I've done would be eliminated. Most of the properties I appraised under $500 were for new loans or for troubled/risky borrowers.

Still, I don't like the idea of bypassing appraisers. One, I think it's risky, and two, it reduces demand for appraisals by some amount.
 

Meandering

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Pennsylvania
Still, I don't like the idea of bypassing appraisers. One, I think it's risky, and two, it reduces demand for appraisals by some amount.
And three, it removes some findable data from our field of view. I still think it will have a red lining effect on rural, family run businesses, that might never have a "real" appraisal, and will be subject to the "quality" of a local salesperson who might sell one or two commercial properties every 5 years or so.

.
 

Wally Ballou

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For some reason I get the non-performing loans in my shop, so I figure I'll be pretty busy in a couple of years....
 

Terrel L. Shields

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Arkansas
it will have a red lining effect on rural, family run businesses
Naughty naughty... can't say that "redline" thing. I said that about the additional work of rural properties and was pooh-poohed. Them Fannie comes out and basically admits they saw the issue.
 

Michigan CG

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I am not worried, just got one today and the value will be significantly below $300,000. Three other private party commercial assignments in the last 40 days.

Banks are still ordering reports for residential properties under $250k and have been for years.
 
Joined
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On the low end, good riddance in our markets - it takes at least as much time to do an office converted from an SFR as any other office, and sometimes more. A small dental practice, architect, lawyer or real estate brokerage is probably credit worthy enough to justify the loan anyway and I'm sure that's part of the underwriting.

However, banks (even at 50% loan-to-value ratios) should still be concerned about vacant land in this price range because while the number of potential buyers for cheap land is much greater, the sophistication to proforma a project goes way down. So, in every market I've appraised coast-to-coast there's more of what they call, "stupid money" chasing "blue sky" at times. I'm not sure if commercial land lending practice is changed by this.
 

George Hatch

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California
I just saw a BPO yesterday on a small preschool. It was horrible and they grossly overvalued the property. They used 2 dental offices and a residential duplex, and all 3 of those sales had less than half the GBA without any consideration of the economy of scale in the analysis.

I've seen several BPOs in the last year and they've all been horrible. The plan seems to be to check Costar and whatever pops up that's the extent of their research. This is especially a problem on the lower ends of the value spectrum because Costar's coverage is so inadequate.
 
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