The business of selling cars is booming, and much has been talked about how that has sent the values of many dealerships through the roof.
However, “blue sky” value applies only to the value of the dealership business. When you want to borrow money from a bank that will be secured by the real-estate component of a dealership, the process can be confusing.
Here are some tips to help make the process less unsettling when the bank has your dealership appraised.
When you get a call from someone hired to appraise your house, not much mystery is in the process that will follow. When you get a call from someone who has been hired to appraise your dealership, though, a good first question might be: “What kind of an appraiser are you?”
If the person is a business appraiser, he will be valuing the dealership itself. However, if he is a real-estate appraiser, which is likely the case if he is working on behalf of your bank, he will be valuing only the land and building and the rights associated with their ownership.
If the distinction between a real-estate appraisal and a business appraisal seems hazy, do not feel bad. It is not clear to many appraisers, either.
The first surprise you may be in for is that a real-estate appraiser will ask you for information about how many new and used units are being sold at your dealership.
Yes, you read that right. Even though he is valuing the land and the building and not the business being operated, he will ask about the business being operated. The number of cars sold from a given location speaks volumes about whether it is a good location from which to sell cars.
Analyzing revenue to form opinions about whether an auto dealership’s location is viable for that particular use is completely appropriate. However, taking the next step to use some formula to convert revenue directly into an indicator of value for the real estate is inappropriate.
Can you see how even experienced appraisers can lose sight of their mission and let business value intermingle with an appraisal of the real estate?
Sales volume is not the only thing you can expect to be asked about. The appraiser likely will request a survey, building plans, costs related to any recent construction, etc. Many property owners and managers are shocked at the amount of information they are asked to provide. How much information you choose to share is a personal choice, and appraisals often can be completed with far less information than is requested.
However, an appraisal is an opinion based on information, and more often than not it is in everybody’s best interest for that opinion to be developed with the benefit of all the information available. If you complain about the results of an appraisal completed with limited information, the appraiser and the bank will have little patience if you suddenly start producing documents you had previously declined to share.
Also, do not assume information you have provided to a bank ever will make its way to the appraiser they hire.
Banks are large and complex organizations with “firewalls” between the people their customers deal with (you) and the people that deal with the appraisers. It is unlikely the appraiser will know anyone at the bank that you know, and vice versa. It similarly is unlikely information you provided will break through the bank’s firewall and get to someone who can share it with the appraiser.
After you have provided the appraiser with property information, he typically will schedule an appointment for the inspection. Appraisers are not usually experts in construction, so a “walk-through” is probably a more appropriate term.
One thing to notice is whether the appraiser takes physical measurements of the buildings. Unless you have provided plans that specify the exact building area, ratio of space that is air conditioned and other key data, a competent appraiser typically will rely on his own field measurements to make these determinations. If he doesn’t take measurements, he probably will rely on information in tax records, and that is likely to be a problem.
After the inspection you are unlikely to hear much if anything from the appraiser as he completes his research and develops his analysis. Many property owners like to ask questions during this time, which they usually find to be an ungratifying experience.
Appraisers ask a lot of questions, but are severely restricted in what they can answer in return. If they are doing the appraisal for a bank, you already may realize they are not allowed to discuss values, but their restrictions run far deeper.
Appraisers also are prohibited from sharing with you when their appraisal will be complete or even how much they will charge. There’s no need to remind them you are the one paying. They know that, but it does nothing to relieve them from the rules in place.
You can ask your loan officer these questions, but the many bank firewalls will keep this information from anyone you have access to until the appraisal is completed, submitted to the bank and reviewed by the bank’s appraisal department.
Once finished, the bank typically will share a copy of the completed appraisal report with you. We all like to think that we have one of the nicer properties around, so it is conceivable you may not agree with the appraisal results. Your recourse, if any, depends on your bank and your relationship with it.
The good news, though, is that most banks want credible valuations, and that means hearing all viewpoints. If you have an argument to make, it typically will listen. Banks are still banks, though, so it is important to follow proper channels. Any criticisms of the appraisal you may have should be directed to your contact at the bank, who will forward them to the bank’s appraisal department, which will forward them to the appraiser who asked you for all that information back when the whole process started.
Believe it or not, the arguments you would like the appraiser to consider likely will make it to him, as long as you do not attempt to communicate him directly.
Successful appeals generally are those that are factual and objective. “The appraisal says the building is 28,000 sq.-ft. (2,600 sq.-m), but it is actually 30,000 sq.-ft. (2,800 sq.-m)” is a strong argument.
“The appraiser does not know anything about dealerships” is a weak argument, even if it’s true. Arguments that are personal probably will not be forwarded through the chain or given much consideration.
The good news is the current lending environment is one of eagerness, so when the appraisal is done correctly, owners of dealerships should be able to borrow all the money their property warrants.
Brad Carter is a principal of Greystone Valuation Services and a real estate appraiser who specializes in the valuation of automobile dealerships. He can be reached at [email protected].
