Article by Roger Schlueter
Borrowers that are buying an Existing Building and making improvements to that building must make sure that the Bank orders the Right Kind of Appraisal. The Right Kind of Appraisal when you have an Existing Building with Improvements to be made to the Building is An “AS IS and AS COMPLETED” Appraisal. This Appraisal will look at the Existing Building you are buying and Value It as it sits. The Appraisal then Adds the Improvements and Values the Building with those improvements Added. An Appraisal that only has a Value of the Building with Improvement makes it Impossible to see if you are paying too much for the Building or Making Improvements that are not Adding to the Value of the Real Estate.
All Appraisals Value Real Estate three ways. The First Way is as if the building was built from the ground up, The Second Way is the Market Value when compared to like properties that have sold in the most resent past. The Third Way is the Income Approach, and looks at the Value when the property is Rented Out and valued by the Income that is generated on a Future Value of those Dollars. These Three Methods are always used but given different Weights depending on the importance of the Method.
Example: You have an Existing Building that is Ten years old or more. This is not equal to a Newly Built Building so the Built from the Ground Up is not Appropriate and is not used. The Best Value is what like properties have sold for in the most resent past. The Market Approach is Appropriate and is used. The Income Approach is also Appropriate and is also used. The Value will be somewhere in between these two values.
Most Banks will ask for an Appraisal that is “AS IS and AS COMPLETE”, but sometimes they do not and the values are lumped together. This lumping the Existing Building and The Improvements makes it impossible to tell if the the building or improvements are overvalued in an Appraisal that is Higher than the Borrower is willing to pay or the Bank is willing to lend. This type of an Appraisal helps the Borrower know if it is worth pursuing the Real Estate or if the improvements need to be reconfigured or reduced.
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