Two Different Valuation Worlds

The appraisal that determines your refi loan amount follows one of two methodologies. Which one applies depends on the property type and the lender.

Sales Comparison Approach (residential): The appraiser pulls 3 to 6 recent comparable sales and adjusts for differences (size, condition, age, location). The value is the median or weighted average of the adjusted comps.

Income Approach (commercial and multifamily): The appraiser calculates trailing 12-month NOI, then divides by the current market cap rate. Value equals NOI divided by cap rate.

A 4-unit property might use either approach depending on the lender. A 12-unit will use income. A SFR rental will use sales comps. Know which approach applies before you order the appraisal.

Sales Comps - Residential Refi

For SFRs and small 1 to 4 unit properties, most DSCR and conventional lenders use the sales comparison approach.

What the appraiser looks at:

  • 3 to 6 recent (last 3 to 6 months) sales within 1 mile
  • Adjustments for size, age, condition, garage, lot size
  • Adjustments for date of sale if the market is moving

Common surprises:

  • The appraiser pulls a comp from a different submarket if local comps are thin. This can drag value down.
  • Renovated comps may not exist in older neighborhoods, so your renovated unit gets compared to tired comps and undervalued.
  • Distressed sales (REO, short sale) can drag the median down if the appraiser does not exclude them.

How to prepare:

  • Pre-pull 5 to 8 strong comps before the appraiser arrives. Provide a typed sheet with addresses and sale dates.
  • Highlight your improvements: kitchen, bath, flooring, HVAC, roof. Photos help.
  • Be present at the inspection. Walk the appraiser through.

Income Approach - Commercial Refi

For 5-plus unit multifamily and all commercial, the appraiser builds an NOI and applies a market cap rate.

What the appraiser pulls:

  • Trailing 12-month rent roll and operating statement
  • Comparable building sales with reported cap rates
  • Submarket cap rate data from CoStar, Real Capital Analytics, or local broker sources

The NOI line items appraisers scrutinize:

  • Vacancy: appraiser typically uses 5 to 8 percent regardless of your actual recent occupancy. Pure 0 percent vacancy is rejected.
  • Management fee: appraiser usually plugs 7 to 10 percent of effective gross income even if you self-manage and report no fee.
  • Repairs and maintenance: appraiser may normalize to $300 to $500 per unit per year if you reported less.
  • Replacement reserves: appraiser usually adds $250 to $400 per unit per year even if you do not actually reserve.

Why this matters: Your operating statement may show NOI of $90,000, but the appraiser may calculate NOI of $76,000 by adding back vacancy, management, and reserves. That alone moves your refi value down by $185,000 at a 7.5 cap.

How to prepare:

  • Provide a 24-month rent roll with lease dates so the appraiser sees real leasing activity
  • Provide the trailing 12 income statement with bank statement reconciliation
  • Pre-pull sale comps that support the value you want; provide them in writing
  • Pre-pull cap rate data for your submarket from broker reports
  • Be at the inspection. Walk every unit. Show capital improvements.

What If The Appraiser And You Disagree

You have options when the appraisal comes in below expectations:

Request reconsideration of value. Submit additional comps with adjustments. Be specific. Most lenders allow one ROV submission.

Switch lenders. Different lenders use different appraisers. If your appraisal was low because of a bad comp set, a new lender may bring a new appraiser with better comps.

Wait and reseason. If your NOI was elevated by unsustainable items (one-time turnover savings, deferred maintenance), waiting 6 to 12 months for a clean 12-month period might help.

Accept the value and adjust loan amount. Sometimes the appraisal is right and your expectation was off. Take the smaller loan and revisit later.

Pre-Refi Diligence

90 days before the refi target date, run a self-appraisal:

  1. Pull 5 to 8 sale comps for the residential approach. What is the implied value range?
  2. Calculate adjusted NOI using lender-style underwrites (5 percent vacancy, 8 percent management, $300 per unit reserves). What is implied value at submarket cap rate?
  3. Compare both to the refi loan amount you need. If both methods support the loan amount with cushion, you are ready. If either is tight, give yourself more stabilization time or look for cap rate compression.

The Wrong Way To Prepare

Most operators show the appraiser nothing and hope. The good appraisers find the data anyway. The mediocre appraisers default to conservative numbers. You can influence the outcome by giving the appraiser the data they need. This is not bribery. It is professional preparation. Lenders expect borrowers to provide rent rolls, comps, and improvement lists.

A Note On Drive-By Appraisals

Some DSCR loans use drive-by appraisals (exterior only). These rely heavily on the comp set and the appraiser's database. There is no interior walkthrough to capture improvements. If you have done a major rehab and a drive-by appraisal will not capture the value, ask the lender for a full appraisal even if it costs more.