Tag Archives: PRC

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.

How to Prepare for an Appraisal

Whether you are buying, selling, refinancing or building, your lender will typically require an appraisal. What do you need to do to prepare for the appraisal? What is changing in the world of appraisals?

We’ve got your answers!

When a lender agrees to begin the underwriting process on a new loan, they will order the appraisal. The lender chooses the appraising company, often in a blind bid process. This means that they let several companies submit their fees and their turnaround time. The lenders then choose which company they want, based upon their budget and timeline.

We have noticed that there are certain areas of the country that do not have enough appraisers. Therefore, appraisal timelines have increased. Make sure you can account for the time it takes an appraisal as you are making your business plans.

The Purpose of an Appraisal:

  • Determine value of the property: Essentially lenders have to determine the value of your property and its potential as a business or home base for a business. Lenders will not loan money greater than the value of the property.
  • Appraisals also consider the business plan going forward, evaluating the financials, management and even market conditions.
  • Consider all types of values:
    • The appraiser will determine the value of a property and business as-is (with no renovations or changes in business practices).
    • An appraisal also delineates an enhanced value (with completed renovations and even changes in operations, including marketing).
    • Finally, the appraiser will calculate how much a property and business would be worth if it had to be sold very quickly due to the borrower’s inability to make loan payments.

Prepping for the Appraisal:

• Instructions for Sellers: If you are the seller, you want your property to appraise well, because you want the buyer to to be fully funded. So make sure your property is clean and well-maintained. Be prepared to show off your property to your appraiser. They will want to see samples of all areas, including public areas and “back of the house” sections. Be helpful about turning in documents so the appraiser can write their report. These documents will include current financials, information about the building, and surveys, among other requests.

• What about Borrowers? Borrowers need to be prepared to meet with the appraiser to tell them their vision. Do you have new ideas do you have for enhancing revenue and controlling expenses? What renovation are you seeking funding for? What strengths do you personally have in ownership and/or management of similar businesses and properties?

• A Note on Property Condition Reports: Borrowers can arrange for a PCR (Property Condition Report) even during the bidding stage, before there is a Purchase Sale Agreement. A PCR does not examine the finances but gives honest and independent feedback to the borrowers on the property’s true condition and what maintenance and renovation needs to be done immediately, in the short term and the long term.

If you would like to discuss financing your future business plans, feel free to contact our team.  We can conduct a business evaluation, reach out to our lenders, offer advice on bidding and secure financing for you. An initial business evaluation is complimentary. We have a network of lenders for acquisitions, refinances and construction projects.