Here’s a story from a former student of mine, Bob (not his real name), about how a bad appraiser can kill you in the real estate development and investment game…
I’ve got another appraisal story that I thought you might enjoy.
My brother, Jay, is building a house at 24 Any street (address changed), a couple doors down from your friend, Ali.
The house is almost finished, so he got the ball rolling on refinancing it.
The property’s value is roughly $400,000. Ali’s place was appraised at $1,200,000. If that is accurate, we figured Jay’s place would be worth more.
Jay knew my horror story about the bad appraisal I got for my investment property, and he knew that to get the best possible appraisal, he would have to wait for everything to be done, but he went ahead with getting his appraisal early anyway.
The appraiser went through December 23rd. At that point, the hardwood flooring was in. The first coat of paint was on the walls. Electrical was done. Heat was on. Kitchen cabinets were in.
Kitchen counters weren’t in yet but bathrooms were being tiled with fixtures yet to arrive. The garage slab wasn’t going to be poured until spring. And the garage doors wouldn’t go in until spring either.
The exterior stone siding on the first floor of the house was done. The plasticized wood siding on the second floor wasn’t complete at the back of the house but the building was wrapped in Tyvek and weather proofed.
Jay had roughly $25,000 worth of work left on a $500,000 build, sitting on land worth $400,000.
The appraisal came back at $380,000, saying the building was 43% done.
I have no idea where those numbers could have come from. All I can say is that appraisers are an interesting bunch.
Except for the garage, Jason’s place should be finished this week, and a new appraiser will probably be through on Monday.
I’m really curious/nervous about how appraisers will value coach houses; maybe they’ll not even bother valuing them, arguing (possibly) that they’re valueless “outbuildings?”
Sent from my iPhone
This is what I wrote back:
Bob, don’t tell Jay but I laughed my head off while reading his story.
I think the appraiser valued Jay’s place as if it was not yet closed in; ie, for less than its land value.
Here’s how his thought process might have gone:
You own a piece of land valued at $400,000.
You build something on it that is deemed by the appraiser as not done yet/not yet habitable.
It’ll cost $20,000 to tear it down, and start over.
Hence, Value = $400,000 – $20,000 = $380,000.
It’s all horse manure, but these guys (appraisers) are like modern day bandits–killing entrepreneurs in real estate to preserve the marketplace for banks, large property owners and equity lords… IMHO.
I deal with all of this in my new learning outcome novel, Jenna’s Story.
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD, ROYAL LePAGE Performance Realty broker, Ottawa Senators founder, Real Estate Investment and Business coach 1-613-762-8884 firstname.lastname@example.org twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com
MAKING IMPOSSIBLE POSSIBLE
postscript: you can read more about equity lords here, https://profbruce.tumblr.com/post/152948304979/equity-lord.
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