Why the appraisal on a small apartment building comes in low.
The building is full, the rents are up, and the appraisal still came in $300,000 under what you expected. On a 10 to 50 unit property that is rarely about the building. It is about what the appraiser had to work with.
By Capituro7 min read
- Small apartment buildings are valued mostly on the income approach, so the appraiser's expenses and cap rate matter more than the sales comps.
- In markets with few recent sales of similar buildings, the appraiser leans on a cap rate that may not reflect your building.
- You can shape the result before the inspection, and you can challenge it after with a reconsideration of value, if you bring data.
How a 10 to 50 unit building gets valued
A house is valued by comparing it to the houses that sold nearby. An apartment building is valued mostly by its income. The appraiser builds a stabilized operating statement, arrives at a net operating income, and divides it by a capitalization rate. Sales comparables still appear in the report, but on a 24 unit building in a market where three similar buildings sold in the last two years, the income approach carries the weight.
That means three numbers drive the value: the income the appraiser accepts, the expenses the appraiser deducts, and the cap rate the appraiser picks. Each one can go against you.
Reason one: the appraiser's expenses are not yours
You know what the building costs to run. The appraiser uses a mix of your actual numbers, underwriting guidelines, and published expense surveys. Three lines are almost always higher on the appraisal than on your statement:
- Vacancy and credit loss. You are 100% occupied. The appraiser uses 5% or more, because that is the market, and underwriting asks for it.
- Management. You self-manage. The appraisal carries 4% to 5% of collected rent anyway.
- Replacement reserves. You spent nothing on capital items this year. The appraisal deducts $250 to $300 per unit.
On a 24 unit building with $330,000 in rent, those three lines alone can move NOI down by close to $38,000. At a 7.5% cap rate, that is about $500,000 of value. None of it reflects anything you did wrong.
Reason two: thin comps push the cap rate up
The cap rate is supposed to come from what buyers actually paid for similar income streams nearby. In Atlanta there are plenty. In Macon, Augusta, Columbus, or a county seat, there may be two sales in eighteen months, and one of them was a distressed building or a portfolio deal. When the appraiser cannot find clean comps, they widen the search geographically, reach further back in time, or lean on published surveys, and a half point of cap rate is the usual result. A half point on a $380,000 NOI is about $360,000 of value.
The market does not know or care what you paid for the building. Neither does the appraiser.
Reason three: the income the appraiser accepts
An appraiser will typically use the lower of the current rent roll and their own estimate of market rent. If you raised rents in the last six months and the new leases are not all in place, the appraiser may use the old rents. If part of the rent roll is voucher income above the market payment standard, the appraiser may cap it. If a unit is leased to your cousin at $400 under market, that is the income they use for that unit.
Send the rent roll and the T-12 before the appraisal is ordered. We will tell you what expenses and cap rate to expect, and what to put in the package.
What to send before the inspection
Most of the value fight is won or lost before the appraiser drives out. Send us a package with:
- The current rent roll with lease start and end dates and any recent increases marked.
- Signed leases for any unit re-leased in the last six months at a higher rent.
- A trailing twelve month operating statement that ties to the bank deposits.
- A capital improvement list with dates and costs. Roof, HVAC, windows, parking lot. Appraisers give credit for what is documented.
- Comparable sales you know about. You are in the market every day; the appraiser is not. If a similar building two miles away sold last quarter at a 6.9% cap, put the address and the price in the package. Off-market sales with a closing statement count.
- The tax bill and the insurance declarations, so the expense side uses real numbers rather than estimates.
- Photos of the renovated units, if the appraiser is not going to get inside all of them.
After the fact: reconsideration of value
If the appraisal comes back low, you are not stuck. We submit reconsideration of value requests on small multifamily as a matter of course, and the programs we use expect them. It has to be data, not an argument. A reconsideration that says "we think the value is higher" goes nowhere. One that says "the report used a 7.75% cap rate; here are three sales in the last twelve months within four miles at 6.9%, 7.0%, and 7.1%, with addresses and closing statements" gets read.
The other productive angle is expenses. If the appraiser used a 45% expense ratio and your trailing twelve, with underwriting vacancy and reserves added, comes to 38%, show the reconciliation line by line. Appraisers will move on expenses when the actuals are documented.
What almost never works: complaining about the value in general, citing an online estimate, or pointing to what you paid.
The worked example: a renovated 10 unit in Middle Georgia
The building. Bought a year earlier with seller financing covering half the price, then roughly $200,000 in renovations and a full lease-up by spring. The owner expected the appraisal to reflect the new rents and the work.
What happened. Few comparable sales in the submarket, so the appraiser leaned on a cap rate that read the town more cautiously than the building deserved. The renovated rents were in place, but with only a few months of history, and the value came in below the owner's number.
What helped. The rent roll and the signed leases at the new rents, a clean T-12 from the property manager, and the renovation invoices. The income approach carried more weight once the income was documented, and our read of the building improved even though the town's cap rate did not move much. The other thing that helped: on a refinance our programs go to 75% loan-to-value, so even at the lower appraised value the owner pulled enough cash out to make the refinance worth doing. At the 65% to 70% a bank-style program would have offered on the same appraisal, it would not have been.
What it means. On a small building in a thin market, the paper is the building, and the leverage is the cushion. Send the rent roll, the leases, and the T-12 as one package, send them before the appraiser goes out, and size the loan on a program with room above 70%.
Figures are rounded and the property is not identified. Terms vary by lender and change without notice.
Appraisal already came in low? Send it with the rent roll. We will tell you whether a reconsideration has a shot, and what 75% on the number that came back looks like.
Frequently asked
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Where this leads next
10+ Unit Apartment Refinance
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OpenSend the rent roll before the appraiser goes out.
We will review the loan request, tell you what the appraiser is likely to use for expenses and cap rate, and size the loan at up to 75% on a refinance so a low number does not end it.