I know there are several different methods an appraiser will use when trying to come to a value for a property…How much of an effect does replacement value figure into the equation of multi-unit? The replacement value given to me by my insurance company is much more than the price which i purchased property for (I dont think this is a bad thing) I asked if there was a premium insurance and they said no it’s the value they’ve estimated to replace my purchase…Can anyone expand on this for me. Currently trying to fix the place up, raising rents and looking to re-fi soon
When I purchase a commercial property, I pay a tremendous amount of attention to the cost approach of the appraisal in the beginning. Often times I’ll order an appraisal review to make sure all the angles were covered. This is because I am buying vacant or mostly vacant properties that are heavily distressed. Your intentions may warrant the same attention on your part. A commercial building that isn’t producing an income or not operating near it’s full potential, can’t reasonably be purchased based off present income.
The reason your insurance company is concerned with the replacement cost is because if the building were to burn to the ground, get washed away from a flood, etc. it would have to be replaced at their expense. It makes perfect sense why they would insurance the place for the replacement cost. They aren’t concerned with the income approach because they aren’t looking for equity dividends. They are valuing your purchase, based off the cost of materials and labor that would go into reproducing the same structure incase it was lost.
So then based of what you’re saying how close do you think the replacement value relates to the actual value of the buildin
In some instances you hear of appraisals coming in just at the required loan amount
No such thing as actual value, value is nothing more than an opinion. The reason I pay the most attention to the cost approach in a vacant, distressed building is because it most likely doesn’t have comps of similar size, use, and condition (sales comparison approach) and doesn’t have a reliable income (income approach). Therefore all I’m left with is the cost to replace the pile of bricks, wood, steel, etc. on a pad of dirt.
In this case, it would be the only reasonable approach to value. It’s a lot like saying to the seller, “I acknowledge there is bricks with mortar between them. I’ll pay you for the present cost of buying new bricks and having someone put mortar between them, less depreciation, because you have old bricks. Along with the value of the land the bricks lay on.”
That IS the value of a property without comps or an income.