The Evolving World of Appraisals: What You Need to Know

The world of appraisals is undergoing significant changes. Understanding these shifts is crucial, whether you are buying, selling, refinancing or building. Your lender will typically require an appraisal. Being informed about the process and the recent changes can help you navigate it more effectively.

The New Landscape of Appraisals:

• Debt coverage vs. loan to value (LTV): Appraisers and lenders have shifted their focus from primarily relying on LTV. LTV is the ratio of the loan divided by the appraised value. Instead, the appraisers and lenders are emphasizing total debt coverage. This approach assesses what percentage of your expenses are going to be tied up in financing costs. They will also evaluate post-closing liquidity and cash flow.  
• Decreased reliance on business potential. When determining the value of your property, lenders are now more conservative, especially for new businesses. They will not loan more than the appraised value of the property, unless additional collateral is considered. For new ventures, appraisers tend to be very cautious.
• Tax returns vs. financial statements. Some government guaranteed lenders are instructing appraisers to focus on tax returns to uncover the “true” financial picture, rather than relying solely on financial statements. Since tax returns and financials break down expenses and revenue differently, and business owner often file their taxes in a way to minimize tax liabilities, there can be discrepancies. At GRP Capital, we compare tax returns with financial statements to determine the true profitability of a business. Further, we work with appraisers to help align their conclusions. We can collaborate with your accountant to reclassify expenses and revenue to enhance the appraised value.
• Appraising a business: As-is, As-Complete and As-Stabilized: Appraisers will evaluate your property and business in three ways: as-is (without any renovations or changes); as-complete with improvements (including completed renovations and operational changes) and as-stabilized (considering a future alignment operational efficacy and stabilization). Understanding these distinctions can help you plan your appraisal strategy effectively.

Planning for an Appraisal Site Visit

• For Sellers and Owners: First impressions matter. If you are the seller or the current owner seeking a refinance, ensure your property is clean, well-maintained and presentable. Appraisers want to inspect all areas including public areas and “back of the house” sections. Providing requested documents promptly, such as current financials, building information and surveys, can also positively influence the appraisal process.

• For Buyers: Buyers should communicate their business vision to the appraiser clearly. Highlight any new ideas for enhancing revenue and controlling expenses, planned renovations and your strengths in ownership or management of similar businesses. This can help the appraiser see the full potential of the property.

• A Note on Property Condition Reports: Borrowers can arrange for a PCR (Property Condition Report) during the bidding stage, even before a Purchase Sale Agreement is in place. Unlike appraisals, a PCR focuses solely on the property’s condition, providing honest and independent feedback on what maintenance and renovations are needed in the immediate, short term and long term future.

If you’re ready to discuss financing your future business plans, our team is here to help.  We offer complimentary initial business evaluations. We have a network of lenders for acquisitions, refinances and construction projects. Our team is ready to guide you through the entire process.