How many ways are there for Canadian real estate entrepreneurs to get screwed?

By Bruce Firestone | Architecture

Jan 13

[The problem with low appraisals]

I am frustrated that Canadian real estate entrepreneurs have so few options when it comes to financing their projects.

My friend, Matt Slobodian from Canada ICI wrote this:

  • The regulatory framework in Canada focuses on safety and soundness (it is federally regulated via OSFI, which implies higher standards) whereas the US is open to decentralization, privacy, experimentation, trial and error.
  • The Canadian market is worth CAD $142 billion per year while the US market is over $1.4 trillion (more than 10x bigger). Canadian Institutions seek growth opportunities by venturing into the US whereas US banks just focus on their massive domestic sector for growth.
  • There are 85 banks in Canada versus 4,938 banks in the US.
  • Canadian market share for the big 5 banks is 89% whereas America’s 5 largest banks only hold 35% of the market there.

Matt used this article as his source: https://www.visualcapitalist.com/canada-u-s-banking-differences/.

He was responding to an earlier email from moi (subject heading: FAIL POINT) saying:

I am reaching out to you because more and more I am seeing good quality real estate entrepreneurs in Canada fail. Why? Well, the fail point is… finance (a lot of the time). You may not agree with me, but from my point of view, my US clients are doing much better in this respect; read this (it’s short, I promise), https://profbruce.tumblr.com/post/190179083309/why-american-businessmen-and-businesswomen-are

Maybe there is nothing we can do about it except stare over the border with envy?

That doesn’t really suit me or I think you either.

The question: Is there anything that can be done about…

Low appraisals
Low LTVs
Lack of competition
Lack of availability

I’m stumped.

Best regards, Bruce

Matt went on to say (about the appraisal issue):

I’ve found that the quality of an appraisal comes down to quality comparables. Most prudent lenders will look at the comparables in determining their value. It’s important to know which appraisers have the best comparable sets of data in order to obtain the highest market value that can be supported. Further if the Borrower has comparable data then most appraisers are open to incorporating these into their reports.

Fine. But here’s an example how this works (or doesn’t) in a RL (real life) case study:

As far as appraisals are concerned, here’s an example of how Canadian real estate entrepreneurs get screwed—a client of mine (a successful fence contractor) has a humongous house on 2-acres.

He built a 1,500 sq ft workshop for $190,000 in his backyard—with all the bells and whistles for his growing business. He paid cash for everything but after completion, he wanted to refi so he could top up his working capital.

Then the lender’s appraiser shows up. First thing he says, “Sorry, I can only appraise the main house.”

Now my guy being a contractor and a straight shooter replied, “WTF!” plus a few more choice words. Next, he fired the appraiser on the spot.

He hired another appraiser who said the same thing but that he would cut my client some slack, “I’ll just add the value of your shop to your house so we can get it refinanced that way! He.He.He.”

It was another damn, quasi-legal workaround…

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
1-613-762-8884
bruce.firestone@century21.ca
twitter.com/ProfBruce
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brucemfirestone.com

• MAKING IMPOSSIBLE POSSIBLE
• FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE
• FEHAJ, FOR EVERY HOME A JOB
• MAKE YOUR HOME WORK FOR YOU, INSTEAD OF YOU WORKING FOR IT
• HIGHER ROI NOT JUST FOR OWNERS AND INVESTORS, BUT FOR TENANTS, GUESTS, VISITORS, NEIGHBORHOODS, COMMUNITIES, TOWNS, VILLAGES, CITIES AND THE ENVIRONMENT TOO

Image source: https://commons.wikimedia.org/wiki/File:Archimedes_screw.JPG

postscript: Matt Slobodian writes in response to this mini case study as follows:

This is an interesting example. The appraiser (I’m assuming) was primarily focused on residential valuations.

You could have suggested a value+ model where they apply a market value (based on comparables) to the home but a cost approach towards the workshop (in this case simply using the cost that your client spent on building his shop) to come up with a final value. This way, there is a clear determination of value on both buildings that can be justified and does not put the appraiser at risk of liability. 

Another approach would have been to engage an AACI-designated appraiser who is qualified to evaluate commercial properties. S/he would be able to value the workshop at FMV along with a separate market valuation for the home. This appraisal costs more to prepare but it may have also have provided a higher value for your client, which in turn could mean more equity repatriation on refinance. Worth the discussion anyway. 

Appraisers should be able to provide their approaches over a phone-call.

Regards, Matt

Unfortunately, most lenders insist clients select an appraiser from their list of approved providers (even though, in commercial real estate and sometimes even residential, clients pay for those appraisals). This means that clients are limited in what they can do to get a fair appraisal, Bruce

postscript 2: if you think it’s tough getting decent appraisals try doing it in small towns.

Lenders and their appraisers seem to detest small towns and even rural areas around big cities (on well and septic). Why? Because the markets are thin, not heavily traded, and it takes a long time to sell a distressed (foreclosed) property. Also, property appreciation is often much less (or even negative) in those marketplaces… at least according to bankers.

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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