Reconciling Divergent Indications Under Time Pressure
You are appraising a 25,000 sq ft light-industrial building for a refinance. The sales comparison approach, using five comparables adjusted for size, age, and condition, indicates $2.9 million (range $2.7M–$3.1M). The income approach, capitalizing net operating income of $210,000 at a 7.5% overall rate derived from local comparables, indicates $2.8 million. The cost approach indicates $3.4 million, but the building is 30 years old and the land is in a supply-constrained submarket where replacement cost has risen sharply. The borrower's loan application states a value of $3.4 million, matching the cost approach. The lender's underwriter emails: 'Borrower says cost approach is the right one-can you weight that most heavily so we hit the loan-to-value target?'
1. Evaluate which approach(es) should carry the most weight and why the cost approach diverges.
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Weighting: The sales comparison and income approaches should carry the most weight for an income-producing industrial property. Both rely on actual market transactions-buyers and sellers of such buildings price on income and comparable sales. They converge tightly ($2.8M–$2.9M), which strengthens confidence.
Why cost diverges: The cost approach indicates $3.4M because replacement cost has risen sharply in a supply-constrained submarket. But cost does not equal value-if buyers can purchase an existing building for $2.8M–$2.9M, a rational buyer will not pay $3.4M just because it would cost that to build new. The gap reflects economic obsolescence (or market conditions) that the cost approach has not fully captured: the market is not rewarding the higher replacement cost. The cost approach is most reliable for new or special-purpose properties with no income/sales evidence-not here.
2. How do you respond to the underwriter's request to weight the cost approach to hit an LTV target?
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Decline, clearly and professionally. The request asks you to select an approach to reach a predetermined value-that is advocacy, not appraisal, and it would compromise independence and objectivity. Respond in writing:
'I understand the LTV target, but I cannot weight an approach to reach a predetermined value. My reconciliation is based on the reliability of each approach for this property type. The sales comparison and income approaches are the most reliable here and converge at $2.8M–$2.9M. The cost approach is a cross-check that overstates market value in this submarket because buyers are not paying replacement cost. I'll document the reconciliation and the reasons the cost approach was given less weight.'
If the LTV no longer works at the supported value, that is a lending decision for the underwriter-not a reason to change the appraisal. Document the request and your response in the workfile.
3. Reconcile the indications into a final value and state the reasoning you would put in the report.
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Reconciliation: Weight sales comparison and income roughly equally (they corroborate each other within ~3%), giving minimal weight to cost. Final indicated value ≈ $2.85 million (round to $2.85M), within the $2.8M–$2.9M convergence.
Report language:
'The sales comparison approach indicated $2.9 million and the income approach $2.8 million; both rely on market evidence and converge closely, supporting a value near $2.85 million. The cost approach indicated $3.4 million but was given little weight: replacement cost in this supply-constrained submarket exceeds what buyers are paying for comparable existing buildings, indicating economic obsolescence not captured by the cost approach. The cost approach is therefore treated as an upper-bound cross-check rather than a primary indication. The reconciled value is $2.85 million.'
Also disclose in the report that the borrower asserted a $3.4 million value and that you considered and rejected the cost approach as primary, with reasons-transparency protects the report and the reviewer.