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Why Did The Appraisal Come In Low ?

January 13, 2023

Often times, the range of value for commercial properties can be widely divergent depending on buyer motivation.

The scenarios I’ve identified are:

1. Buying a vacant or partially vacant property for personal business use (owner-occupant)

2. Buying a vacant – or primarily vacant – property as an investment with a tenant “in pocket” [1] (passive investor)

3. Buying a fully or partially leased property as an investment with a third-party tenant in-place (passive investor)

4. Buying a vacant property as an investment without a tenant in-place or in pocket (active investor)


These scenarios have substantially different risk profiles, and their buyers are motivated for different reasons.


Different risk profiles translate into different values; therefore, qualifying and quantifying the risk profile of your subject property is incredibly important when attempting to price it for a listing or value it within the scope of an appraisal.


The risk profiles among buyers of vacant buildings are generally understood along the following continuum:

A purchase of a building vacant without tenant in place or in pocket is less valuable than a purchase of a vacant building with a tenant in pocket which is less valuable than a vacant building purchased for owner occupancy.

The nuance here is that a prospective owner-occupied property is immediately stabilized upon acquisition – meaning it will be fully occupied immediately and is thus more valuable to its prospective buyer.


A property purchase with a tenant in pocket will be stabilized upon acquisition but this is unknown to the seller – justifying the reason for the premium compared with a vacant building without a tenant in pocket and the discount compared with owner occupant purchases. 

The scenario that often causes contention (when I’m wearing my appraisal hat) is when a buyer of a large vacant office building, for example, is purchasing the property with a tenant “in pocket” or for prospective owner occupancy. A listing agent is naturally going to want to price the property with these types of buyers in mind as it maximizes value relative to what a buyer would be willing to pay as an investment without a tenant in-place or without one in pocket.

But the questions are:


  • How many of these buildings have sold economically vacant [2] to owner-occupants or partial owner-occupants over last 3 - 5 years and how long were those properties listed for?

  • How many of these buildings have sold economically vacant to investors with tenants in pocket over last 3 - 5 years and how long were those properties listed for?

  • How many of these buildings have sold economically vacant to investors without tenants in pocket over last 3 - 5 years and how long were those properties listed for?

  • Finally, what is the relationship between available supply of similar properties over last 12 months compared with last 3 - 5 years?


Let’s say for example, that this vacant office building is 40,000 square feet.

My approach to valuing this type of building would start with identifying who is buying 20,000 to 80,000 square foot offices over the past 3 – 5 years. Note that I didn’t start with identifying what office buildings are selling for – because the first step is delineating your market; the last step is valuation.


All too often, the most important step of really identifying the most likely buyer is skipped.


I sometimes see appraisers state that the most likely buyer is an investor or owner occupant. Isn’t this just another way to say anybody? Unfortunately, valuation is not that easy despite how some would like it to be.


As previously noted, these distinct buyers would value the property differently and the identification of either of these buyers would inform what sales are truly comparable.

In this example, let’s say that 50 vacant office building sales occurred in a submarket over the past 3 – 5 years. Of these sales, 50% were purchased for owner-occupancy, 25% were purchased with tenants in pocket, and 25% were purchased without tenants in pocket.

These sales revealed the following trends in pricing:

  • Prospective owner occupants were willing to pay $150.00 per square foot, on average.

  • Investors with tenants in pocket were willing to pay $125.00 per square foot, on average

  • Investors without tenants in pocket were willing to pay $100.00 per square foot, on average


So, your subject property value could range from $100.00 to $150.00 per square foot depending on which of these scenarios actually comes to fruition.

Does that make your subject property worth $150, $100, or something in between?

Let's say the subject property is perfectly average - in terms of how it competes among other properties available in the market. If the goal is assessing market value, I believe the most appropriate way to analyze the subject would be to assign probability of any of these outcomes occurring in the following way:

  • Prospective owner occupants: $150.00 per square foot x 40,000 x 50% =  $3,000,000

  • Investors with tenants in pocket: $125.00 per square foot x 40,000 x 25% =  $1,250,000

  • Investors without tenants in pocket: $100.00 per square foot x 40,000 x 25% =  $1,000,000

  • Total Market Value $5,250,000


This reconciliation indicates that the subject property is worth $131.25 per square foot

($5,250,000 / 40,000 square feet). 

Here is where the rubber meets the road. It is incredibly important to note that this analysis is only relevant when the subject is perfectly average - meaning the likelihood of any of these

3 scenarios occurring will be consistent with their pro rata capture of historical demand.


As we understand, in practice, this is rarely the case.

What comes into play here is the concept of "subject capture" which essentially is an analysis of how much market demand the subject property can absorb and at what price.


Appraisal literature suggests that analysts are able to support how much weight is placed on the likelihood of any of these scenarios occurring, for instance, based on how it’s positioned in the market among its competition.


Therefore, some offices will have a 50 - 99% likelihood of being purchased by owner occupants and some will have a 1 - 50% likelihood. This depends on locational factors, physical characteristics,

or economic characteristics such as higher-than-average property taxes or insurance, for example.

The question that needs to be answered by brokers trying to obtain an offer at the high-end of the range is: what makes this subject property more desirable to owner-occupants than the average office?


And truly, this is a very difficult - if not impossible - question to answer as many owner-occupant purchases are consummated due to an immediate need to have more space to support growth.


Sure, we can consult historical trends, but the reality is that some purchases may not be consistent with historical pricing. In the above example, brokers would like to price a property at $150.00 per square foot to attempt to find this perfect buyer, however, what are the chances of that happening?

Even if it does, is that a reflection of "market value" or is it a reflection of an atypically motivated buyer?

Or is it a reflection of historically low supply thus justifying the price relative to market value?

These factors must be weighed and analyzed by the appraiser but should also be recognized

by the broker so as to identify a potential roadblock to closing.

So, getting back to our example, does this mean that the subject property is not worth $150.00 per square foot to prospective owner occupants?

Absolutely not.

Does this mean the listing agent is incompetent for advising to accept an offer of $100.00 per square foot to an investor?


It depends on how long the property has been on the market but the answer is probably not. 

The fact is, all sales commence based on individual needs and circumstances at any given point in time.

These needs and circumstances change daily. A prospective owner occupant or investor has ever-changing space requirements or investment goals, respectively. Available supply changes daily with new inventory being brought to market and existing inventory going under contract. A building could be absolutely perfect for 1 buyer but could be too large, too small, too old, have inadequate parking, or in a bad location to the majority of market participants.


What needs to be weighed by brokers is the likelihood of finding that perfect buyer and how long that may take. What needs to be weighed by appraisers is the probability of any of these outcomes from occurring. 

[1] “In pocket” means that a buyer has a signed commitment from a third-party tenant prior to offering to purchase. This tenant will occupy the space after the buyer closes on the transaction

[2] "Economically vacant" refers to a property that may be physically occupied by an existing owner-occupant or third-party tenant on the month-to-month lease, and is able to be occupied immediately by the prospective buyer. 

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 Michael J. Rohm, MAI, CCIM, R/W-AC, is a fee appraiser and real estate agent working throughout Pennsylvania.

He is president and owner of Commonwealth Commercial Appraisal Group and is director of valuation advisory and senior associate with Landmark Commercial Realty. Contact him at

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