In a real estate market near its bottom, how does an appraiser justify that strong demand out weighs comparable sales?
The example provided here is based upon an actual transaction. Since it is fairly recent, I’ve changed numbers to protect the parties involved!
Here’s the issue:
A Seller owned a well located 25 year old improved property. It is very unique with versatile potential uses making it very attractive to a number of prospective purchasers. What makes it even more unique is that with its zoning designation there were very few competitive properties on the market at the time.
The owner contacted his commercial real estate professional.
The broker researched the market and founda handful of somewhat comparable sales. The seller dusted off a year old appraisal that put the value at $3.8 million. All this information gave the impression that the market value was in decline since then.
The broker also contacted commercial building contractors to get an estimate on a replacement cost for the improvements. The market for available raw land was studied. Although very few properties were found to be available, a total building/development package for a new facility summed up to be $4.5 million. That’s as if new. In our case, after accounting for the fact that the subject’s improvements had aged 25 years, a significant amount of depreciation required a negative adjustment to that figure.
The conclusion was that after considering all past transactional information, ”on paper” a value range of $3,600,000 to $3,800,00 seemed to be the place.
With all that analysis and despite what appeared to be insurmountable odds, the broker went out on a limb and stated that the circumstances were such that a higher figure should be achieved. Due to the condition of the property and the scarcity of similar product in the immediate market, it was believed that even a well educated buyer would pay a healthy premium for this gem.
The decision was made to ”ask” a figure of $5.6 million – a good 55% higher the “on paper” value. Since it was such a unique property, it was the broker’s opinion that this asking price would not scare away serious buyers.
After one week on the market the assumption proved correct. An offer was presented for $4.4 million from a very qualified buyer who had studied the real estate market. That’s 32% above comparable value! Then, within a week, and while still contemplating the first offer, another qualified proposal came forth at $4.2 million.
All this … in a supposedly declining market?
Of course this was very exciting, but they did have a dilemma!
You may be asking: “A deal at $4,400,000! Where’s the problem?”
Not so fast, Amigo!
There’s another player in both offers. This guy is as much about “Show Me the Money” as he is “Show Me the Value.” Both buyers included in their proposals that they will be seeking loans of no greater 65% of the purchase price. So, yes the third wheel in the deal is the friendly banker, who required an appraisal of the property … and both buyers verbally stated stated that they would not pay more than appraised value.
… and now that the seller has seen two offers in the $4 mil range, he is not about to sell it for less!
The question for our appraisers out there is what other considerations would you follow in this real estate market to arrive at a true fair market value? Is it possible that this property could actually appraise for over $4 million? If so how can that be justified? What is missing here?
One well respected appraiser will give us his professional opinion next week! Stay tuned for thoughts from Michael Pugh, Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC., in Frederick, Maryland.