Greetings,
I was hoping I could get some answers from the experts on this board. I recently was denied a line of credit for my 7 unit apartment building due to a low, or as I see it sloppy, appraisal and I'm hoping to try and recoup some or all of the $3000 I spent on it. In short, the property appraised for 40k less than when I purchased the property 1 year ago even though I've added 3 rentable units, separated each unit onto its own electric meter, has a wet and dry sprinkler system installed, completely renovated 1 unit, and added a bedroom in the unit I'm living in. As you can imagine, there were substantial qualitative and quantitative errors in the report.
Just to give a little more background on the property, I purchased the property using a 203k renovation loan for $400k of which the sellers received $242. The building was built by the former code enforcer of the city and is in great condition. The catch (why it sat on the market for 4 years) was that the building needed to be retrofitted with a sprinkler system to be brought up to code. The former owner constructed the 7 unit complex by himself and never felt the need to get any permits (he was the code enforcer and furthermore, the Mayor was and still is living here). The property had several offers when it was listed for $575k back in 2009 prior to any knowledge of the required upgrades. Needless to say, those offers fell through when they realized the sprinkler system would cost $125k+. Furthermore, the non-conforming variance was only for 3 units so the majority of the building couldn't legally be rented. 4 years later the family sells it to me at a very undervalued price because of the associated risks. I made all the necessary upgrades as well as some other upgrades I discussed above and most importantly, I got a lawyer and went in front of the board of adjustment and had the variance extended to 8 units (I'm in the process of splitting my 4000 sqft unit). There was no guarantee that the board would approve my variance and was the single biggest risk of purchasing this property (ie where I gained the most value, 4 additional units). My first appraisal was for a 3 unit to 4 unit conversion and came in at $460k. I gave this appraisal to this appraisal company, but they didn't look at it (by their own admission) and appraised my property for $420k (I was seeking $700k)!
Now for the errors:
Quantitative
1. In the Cap rate analysis section, "We have reconciled an 8.75% capitalization rate from the Band of Investment and Debt Coverage Ratio analysis."
Band of Investment: 8.67%
Debt Coverage Ratio: 8.20%
How can an average be greater than the 2 numbers you put in?
2. On the comp comparison section they used the wrong square footage and deducted 5% from 3/4 comps. There is a 2500 sqft poach that wraps around 2 sides of the building. Earlier in their report, they correctly estimated the habitable living space as 8665sqft, but for some reason they chose to use the what's on the public record (which included the porch) instead of what they calculated when comparing comps.
3. In the same section, the occupancy rate of the 2/4 comps
is impossible. They stated an occupancy of 95% for a 6 and 16 unit building which doesn't work out to a whole unit even if you prorate down to the day. This figure appears to be entirely made up and 5% was knocked off for this. The other 2 comps make sense though, 100% occupancy and 87% for the other (7/8 units filled). Given how much they took off for just 1 unit vacant, then if these properties were indeed lower than 95% occupancy, then it would have greatly affected the per unit price.
4. Improperly assessing the rental value of my unit. They said since it was a 2BR 2.1BA it would only rent for $900/month which is reasonable for a typical apt of that size. However, my unit is the original house and is 4320 sqft (50% of all the habitable space) with it's own separate entrance, the only covered parking in the building and sole access to 2000/2500sqft of the poach (everything except where I keep the garbage cans). Furthermore, I was in the process of completing the 3rd bedroom when they came through and it was completed between when they saw it and when the appraisal was filed. I thought they would have counted it towards my unit, but they chose not to or just completely forgot. The appraiser didn't even have a notepad, he was just jotting things down randomly on the back/side/margins of some of the paperwork he brought. I remember talking to my wife about it and was worried they were missing things bc everything he wrote down was out of order. Bottom line is that $900/month is absurd for a space that size with the additional amenities. My argument was that the rent rate should be comparable to a single family home of that size bc there is no interaction with other tenants (separate entrance/parking/trash) and that that was the structures original intended purpose.
Qualitative
1. I know these are much harder to dispute which is why I'm not relying on these to stick if I take them to court. Location I thought should be upgraded from average to good when comparing my property to the comps. The 3 main reasons were crime rate (taken from trulia), school rating (taken from trulia), and the fact that the small local airport just over a mile away started doing commercial flights within the last year. One of my tenant chose my property specifically for close access to the airport. Other factors like access to public transit, major roads, banks, shopping, and grocery stores were comparable or better than the 4 comps. Furthermore my property is unique (excluding comp #1, see below) because it's the only apartment building in a small, quite neighborhood surrounded by single family homes. Most of my tenants moved to my property from the major city 10 minutes away because they wanted the suburban lifestyle, but still wanted to be close to the city. I asked the appraisers about this specifically and they said they could account for this in their report (they didn't).
2. Comp #1 was mostly wrong. What they didn't know is that I put 2 offers on Comp #1 and that is how I met my real estate agent. Having intimate knowledge of this property, the condition needed to be lowered from good to average or maybe even poor. There was a mysterious water leak in the basement and a major crack in the basement wall. Also, only half the units were in good condition and were obviously the ones who's pictures made it into the listing. Furthermore, crime is substantially higher in that neighborhood and is surrounded by lower quality single family homes (the one across the street is abandoned).
As I'm sure you can tell, this is a very very poor appraisal. After looking at the companies website it seems like a very small portion of their business involves mulit-family dwellings and under multi-family dwellings all it says is they specialize in 50-1000+ units. After looking at the scrolling pictures of past properties they've appraised, most are large apartment complexes or housing developments. There isn't any pics of anything that remotely resembles the scale of my building. It appears they decided the $242k out of the $400k that I gave the sellers represented the fair market value and went from there instead of looking at the appraisal I gave them for $460k or the listing history or even the original agreement of sale. I know I didn't lose $40k by adding 3 rentable units, bringing the building up to code, splitting the electric, renovating a unit, and adding a bedroom. I even got a letter from a big investment firm wanting to buy the property now that I did all the leg work getting a variance and bringing it up to code. Any advice on how I can get back the $3000 I spent on this horrible appraisal would be greatly appreciated. What should my next step be? Should I ask for a refund directly from the appraiser first? I shared every point I made here with the bank, but I don't know if the appraiser is aware of all the mistakes.
I was hoping I could get some answers from the experts on this board. I recently was denied a line of credit for my 7 unit apartment building due to a low, or as I see it sloppy, appraisal and I'm hoping to try and recoup some or all of the $3000 I spent on it. In short, the property appraised for 40k less than when I purchased the property 1 year ago even though I've added 3 rentable units, separated each unit onto its own electric meter, has a wet and dry sprinkler system installed, completely renovated 1 unit, and added a bedroom in the unit I'm living in. As you can imagine, there were substantial qualitative and quantitative errors in the report.
Just to give a little more background on the property, I purchased the property using a 203k renovation loan for $400k of which the sellers received $242. The building was built by the former code enforcer of the city and is in great condition. The catch (why it sat on the market for 4 years) was that the building needed to be retrofitted with a sprinkler system to be brought up to code. The former owner constructed the 7 unit complex by himself and never felt the need to get any permits (he was the code enforcer and furthermore, the Mayor was and still is living here). The property had several offers when it was listed for $575k back in 2009 prior to any knowledge of the required upgrades. Needless to say, those offers fell through when they realized the sprinkler system would cost $125k+. Furthermore, the non-conforming variance was only for 3 units so the majority of the building couldn't legally be rented. 4 years later the family sells it to me at a very undervalued price because of the associated risks. I made all the necessary upgrades as well as some other upgrades I discussed above and most importantly, I got a lawyer and went in front of the board of adjustment and had the variance extended to 8 units (I'm in the process of splitting my 4000 sqft unit). There was no guarantee that the board would approve my variance and was the single biggest risk of purchasing this property (ie where I gained the most value, 4 additional units). My first appraisal was for a 3 unit to 4 unit conversion and came in at $460k. I gave this appraisal to this appraisal company, but they didn't look at it (by their own admission) and appraised my property for $420k (I was seeking $700k)!
Now for the errors:
Quantitative
1. In the Cap rate analysis section, "We have reconciled an 8.75% capitalization rate from the Band of Investment and Debt Coverage Ratio analysis."
Band of Investment: 8.67%
Debt Coverage Ratio: 8.20%
How can an average be greater than the 2 numbers you put in?
2. On the comp comparison section they used the wrong square footage and deducted 5% from 3/4 comps. There is a 2500 sqft poach that wraps around 2 sides of the building. Earlier in their report, they correctly estimated the habitable living space as 8665sqft, but for some reason they chose to use the what's on the public record (which included the porch) instead of what they calculated when comparing comps.
3. In the same section, the occupancy rate of the 2/4 comps
is impossible. They stated an occupancy of 95% for a 6 and 16 unit building which doesn't work out to a whole unit even if you prorate down to the day. This figure appears to be entirely made up and 5% was knocked off for this. The other 2 comps make sense though, 100% occupancy and 87% for the other (7/8 units filled). Given how much they took off for just 1 unit vacant, then if these properties were indeed lower than 95% occupancy, then it would have greatly affected the per unit price.
4. Improperly assessing the rental value of my unit. They said since it was a 2BR 2.1BA it would only rent for $900/month which is reasonable for a typical apt of that size. However, my unit is the original house and is 4320 sqft (50% of all the habitable space) with it's own separate entrance, the only covered parking in the building and sole access to 2000/2500sqft of the poach (everything except where I keep the garbage cans). Furthermore, I was in the process of completing the 3rd bedroom when they came through and it was completed between when they saw it and when the appraisal was filed. I thought they would have counted it towards my unit, but they chose not to or just completely forgot. The appraiser didn't even have a notepad, he was just jotting things down randomly on the back/side/margins of some of the paperwork he brought. I remember talking to my wife about it and was worried they were missing things bc everything he wrote down was out of order. Bottom line is that $900/month is absurd for a space that size with the additional amenities. My argument was that the rent rate should be comparable to a single family home of that size bc there is no interaction with other tenants (separate entrance/parking/trash) and that that was the structures original intended purpose.
Qualitative
1. I know these are much harder to dispute which is why I'm not relying on these to stick if I take them to court. Location I thought should be upgraded from average to good when comparing my property to the comps. The 3 main reasons were crime rate (taken from trulia), school rating (taken from trulia), and the fact that the small local airport just over a mile away started doing commercial flights within the last year. One of my tenant chose my property specifically for close access to the airport. Other factors like access to public transit, major roads, banks, shopping, and grocery stores were comparable or better than the 4 comps. Furthermore my property is unique (excluding comp #1, see below) because it's the only apartment building in a small, quite neighborhood surrounded by single family homes. Most of my tenants moved to my property from the major city 10 minutes away because they wanted the suburban lifestyle, but still wanted to be close to the city. I asked the appraisers about this specifically and they said they could account for this in their report (they didn't).
2. Comp #1 was mostly wrong. What they didn't know is that I put 2 offers on Comp #1 and that is how I met my real estate agent. Having intimate knowledge of this property, the condition needed to be lowered from good to average or maybe even poor. There was a mysterious water leak in the basement and a major crack in the basement wall. Also, only half the units were in good condition and were obviously the ones who's pictures made it into the listing. Furthermore, crime is substantially higher in that neighborhood and is surrounded by lower quality single family homes (the one across the street is abandoned).
As I'm sure you can tell, this is a very very poor appraisal. After looking at the companies website it seems like a very small portion of their business involves mulit-family dwellings and under multi-family dwellings all it says is they specialize in 50-1000+ units. After looking at the scrolling pictures of past properties they've appraised, most are large apartment complexes or housing developments. There isn't any pics of anything that remotely resembles the scale of my building. It appears they decided the $242k out of the $400k that I gave the sellers represented the fair market value and went from there instead of looking at the appraisal I gave them for $460k or the listing history or even the original agreement of sale. I know I didn't lose $40k by adding 3 rentable units, bringing the building up to code, splitting the electric, renovating a unit, and adding a bedroom. I even got a letter from a big investment firm wanting to buy the property now that I did all the leg work getting a variance and bringing it up to code. Any advice on how I can get back the $3000 I spent on this horrible appraisal would be greatly appreciated. What should my next step be? Should I ask for a refund directly from the appraiser first? I shared every point I made here with the bank, but I don't know if the appraiser is aware of all the mistakes.
