CRE-Finance LLC Helps Individuals Understand How to Read a Commercial Loan Appraisal

CRE-Finance helps individuals learn about any commercial loan appraisal (or other real estate valuation instrument). There are ten critical steps to follow when reading/analyzing and assessing the the "goodness" of a commercial loan.

The most important thing that an individual must understand about any commercial loan appraisal (or other real estate valuation instrument) is that it is only as good as its logic according to Todd Tretsky of CRE-Finance.  Tretsky also states that in other words— never accept an appraisal’s conclusion regarding value without looking beyond the surface to understand the logic that leads to the conclusion and without making some reasonable determination as to the quality of the logical argumentation.

With that in mind, the professionals at Commercial Real Estate Finance LLC offer ten critical steps to follow when reading/analyzing (and thus attempting to assess the “goodness” of a commercial loan appraisal).

(1)    "The very first thing you must ask when analyzing a commercial loan appraisal is to what degree is the appraisal transparent?  In other words, how much of the logic leading to the value conclusion is on display for the reader?  If the answer is none, the appraisal is useless" according to Todd Tretsky.  Throw it away.  If the answer is some (in other words there are gaps in the logic) then the individual must either (a) once again, decide to toss the appraisal, (b) decide to accept some degree of uncertainty, (c) attempt to fill the gaps  or (d) contact the appraiser and see if they can provide the missing logic.  (Sometimes the appraiser will have the information needed on file, but they just didn't include it in their final report.)  Ideally the answer is none or very little, and the commercial loan appraisal can be said to be highly transparent.  At any rate, people need to be asking this question throughout an analysis.

(2)    The next thing is get a handle on what is being appraised.  Is it a home, a commercial building, a parcel of land?  What are the basic specifications?  Where is it located?  Is it urban or rural?  How desirable is the surrounding area?  Are there functional inadequacies?  If it is land, what horizontal infrastructure is in place or lacking and what does the current zoning allow?

(3)    I have never heard anyone else say this, but I stand by it (at least when valuing buildings and structures; for valuing land, not so much), says Todd Tretsky of CRE-Finance LLC: one of the first things I do after getting a basic sense of the property is go straight to the photos.  (And by the way, make sure you have an original appraisal or color copies.  The photos can be quite useful, but not if they are blacked out by copying and faxing.)  Study the photos of the subject property and then compare them to the photos of each of the various comps.  Individuals will be surprised at how often there will be a  sniff some bad cheese at this point in the process (particularly when dealing with structures).  What indivudals should look for here is: (a) whether or not the comps are in the same general condition as the subject property, and (b) whether or not the comps are in the same general “class” as the subject property.  By class Todd Tretsky is referring to the level of quality and distinction of the property. "If the answer to one or both of these is no, it is not necessarily game over, but you will now be looking even more closely at the adjustment matrix later on to see if the apparent differences are effectively accounted for to your satisfaction" according to Tretsky.

(4)    Next check the effective date of the value given.  How current is the commercial loan appraisal?  According to CRE-Finance "In a steady up economy it was comfortable using appraisals that were as much as 1-2 years old.  They would adjust the value to be in-line with changes in the market.  With the chaos of the past 5+ years, this method is not as effective and must be utilized with great care".  Generally speaking (though this would depend to a certain extent on the region) you would want your appraisal to be less than 6 months old.

(5)    Check carefully to see if there are any “subject to” items associated with the value.  Generally this will initially be indicated by checking a box that indicates the appraised value is subject to certain additions, improvements, or modifications as indicated later in the appraisal.  This of course is a critical item, so make sure you have read through the entire body of the appraisal so as not to miss any such “subject to” items or conditions.

(6)    Look to see if any extraordinary assumptions are made by the appraiser.  Here again, people will be forced to read through the entire body of the appraisal to be sure.  On more than a few occasions CRE-Finance has seen what looked to be a perfectly reasonable appraisal completely neutralized (or actually nullified) at the discovery of one or more extraordinary assumptions.  The problem with most extraordinary assumptions is that they are indeed extraordinary.  "If  evaluating a parcel of bare land zoned rural agricultural, and an extraordinary assumption in the appraisal states that “The zoning will be changed to allow multi-unit residential at 8 units per acre.” … well chances are, the gig is up" says Todd Tretsky.  Even if some serious local zoning change is in the works, what is the chance that a person can count on it to come through and thus turn this “straw” property into gold?

(7)    Take an accounting of the methods utilized for valuing the subject property.  In Todd's opinion, a market sales comparison approach is ALWAYS essential and should be the primary method—and the one given most weight—in valuing a property.   He also says the only true value in a  market economy is the amount that others are willing to pay for it, and thus the attempt to estimate market value by looking at recent sales—though still at best a process of estimation—is the only method we have that goes to the heart of the matter.  Beyond that, it would be nice to have a cost approach and an income approach (where relevant) but these are, at best a good way to cross-check the market value derived by the comparison approach.

(8)    Take a close look at is the aging of the comps.  If all the comps were sold quite recently, then an indivudal is good in this department.  But if one or more of the comps are more than 6 months old, this may be a problem.  The next step would be to look at the comp matrix to see how much the appraiser adjusts the target value to factor comp aging.  If one or more of the comps are listings … well then, these aren’t really comps at all but comp workups using nothing but listings.  "This is totally unacceptable. Anyone can list a property for any price they want.  It would perhaps be reasonable to have 1-2 listings along with at least as many “true” comps, but even this is getting into squishy territory.  So here again, individuals have to look at how the appraiser adjusted the subject value based on the “listing” comps" according to Tretsky.

(9)    " The majority of your effort should befussing over the comp matrix" says Tretsky.  This is the matrix which compares various characteristics of the subject property with various characteristics of the comps and makes specific adjustments for each of the comps to arrive at adjusted values for the comps (effectively attempting to monetarily “convert” each of the comps into the subject property).  If there are (a) many adjustments, (b) large adjustments (relative to the price of the property), and/or many seemingly subjective adjustments, then seriously question the integrity of the appraisal.  Walk through each and every adjustment, and here again,  look for transparency.  Does the appraiser explain the logic behind his adjustment decisions?  If not, there is a transparency problem.  At the end of the day, people must be comfortable with the adjustments and  feel that they are objective, transparent, well thought out, and seemingly reasonable.  If not either (a) discard the appraisal, (b) contact the appraiser for further explanation, and/or (c) revise one or  more adjustments and revise the final subject value accordingly.

(10) And finally be sure and take a look at other methods of valuation utilized (generally income and cost on commercial loan appraisals).  And then determine how the appraiser has gone about reconciling the different values arrived at utilizing different methods.  Sometimes a weighted value approach is used.  If so, how much weight is being given to the comp value approach relative to other methods utilized.  Generally  see all or at least the vast majority of weight given to the comp analysis.  If the appraisal doesn't explain the reconciliation, there is a transparency problem.  If the comp value approach is not given enough weight, fall back on the value arrived at by the comp value approach as the final value.

And there you have it.  There is a great deal more that can be said about reading an appraisal, and certainly this list of ten items is far from exhaustive, but it does give  a few things that should not be overlooked.    

If you have any questions regarding commercial real estate or are seeking financing, do not hesitate to contact Rich Tretsky or Todd Tretsky at 855-515-5585 or visit us at