Commercial Real Estate Lenders, Make Sure the Appraiser is Loyal to YOU

Suppose a commercial real estate appraiser appraises a $1 million commercial building.  Because commercial real estate appraising is so inexact, he can justifiably bring the appraisal in at $1.2 million or $800,000 - depending on whether he is loyal to the borrower or the lender.

Commercial real estate appraisers have a way of unconsciously trying to please the folks who are paying them.  If they are hired by the commercial real estate lender, then they will appraise the commercial property very conservatively.

If a commercial real estate appraiser is hired by the borrower, however, he will too-often work hard to find comps (usually not quite so comparable) to justify a higher value.  In fact, commercial real estate appraisers have a tendency of "falling in love with the borrower."  By this I mean they become vested in the idea of helping this "poor borrower" get as large a loan as possible from this "big, mean mortgage company" who can probably afford a loss anyway because they are so rich from gouging borrowers with a high interest rate.

Therefore, as a lender making commercial real estate loans, it is critical that the commercial real estate appraiser be loyal to you and not the borrower.  Otherwise, you'll be stuck with a portfolio of bad loans that are upside down; i.e., the loan is greater than the value of your collateral.

This is one of the reasons why experienced commercial real estate lenders insist on ordering the appraisal themselves.  If the commercial real estate appraisal is ordered by the borrower or a mortgage broker, most experienced lenders will assume that the appraisal is tainted and over-valued.