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Appraisal

The appraisal came in low

You had a price, a lender and a plan, and then the appraisal landed under the number and the loan shrank with it. This is one of the most common ways a commercial deal stalls in British Columbia, and it is usually fixable, though rarely by arguing with the appraiser.

Halftone illustration of a surveyor's level beside a small building elevation.

Why the loan moved when the value moved

Lenders size against the lesser of purchase price and appraised value. When the appraisal lands under the price, the loan follows it down, and the difference has to come from somewhere else.

On income producing property the appraisal is usually an income approach. That means a low value is often a view on your rents, your vacancy assumption or your expenses rather than a view on the building itself. It is worth reading the report closely to find out which. You can also size the loan against the new value before you decide anything.

What actually gets an appraisal reconsidered

A reconsideration of value succeeds on new facts, not on disagreement. Comparable sales the appraiser did not have. An error in the rent roll. A lease signed after the inspection date. Square footage measured wrong. Capital work that is not reflected in the report.

It goes through the lender who ordered the appraisal, never directly to the appraiser. A calm submission of documents does far more than an argument about the number.

The four ways these deals still close

Put in more equity. The simplest answer, and the cheapest, where the cash exists.

Add a second mortgage. A charge behind the first works, but it costs meaningfully more than the first mortgage and should be treated as short term. Of the four routes this is the most expensive.

Reopen the price. The appraisal is evidence, and a vendor who wants to close will often listen to it.

Change lender. Move to a lender whose sizing is driven by something other than that appraised value. What lenders look for is set out on the commercial mortgage requirements page.

When the honest answer is to walk

If the appraisal is right and the price was wrong, the appraisal has just saved you from overpaying.

Paying the difference in cash to force a deal that the market does not support is how people end up trapped in a building they cannot refinance.

FAQ

Low appraisal questions we hear most.

Usually not. Commercial lenders order appraisals themselves from their own approved panel so the appraiser is working for them. An appraisal you commissioned can be useful background, but most lenders will not lend on it.

Commercial appraisals of income property are driven by net operating income and a capitalisation rate, not by what a buyer was willing to pay. If the appraiser applied a higher cap rate or trimmed your income assumptions, the value falls even though the building has not changed.

The borrower does, even though the lender orders it and the report is addressed to the lender. Cost varies with the size and complexity of the property, and development or specialised assets cost more than a straightforward income property.

Sometimes, through a reliance letter from the appraisal firm, and sometimes not. Assume a new appraisal may be needed and build the time and cost into your plan.

No. It means the loan is smaller than you expected. What kills deals is finding out too late to do anything about it, which is why it is worth having someone look at the numbers before the appraisal is ordered.
Keep reading

Related situations

How a commercial appraisal worksThe three approaches, who orders the report and what drives the number.Commercial mortgage calculatorSize the loan against the appraised value rather than the price.Commercial mortgage requirementsWhat lenders weigh besides the appraisal.Private and second mortgagesHow the cost of a second charge is built.Have a broker read your dealSend the property and the numbers and get a straight answer. No fee, no credit check.

Send us the appraisal.

A senior broker will tell you whether the value is worth challenging, and what the deal looks like if it is not.

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