Bed and Breakfast Appraisals Versus Valuations

Photo of the Inn at Ellis River NH

Lately, I have been noting an increasing reliance on appraisals to establish value and price of a Bed and Breakfast or Inn.  In fact, for the reasons discussed below, an appraisal is a very poor indication of value for an Inn. 

This is especially disturbing when sellers pay significant amounts of money for an appraisal to establish a price in the marketplace.  What is the basis for our concern?  Essentially, an appraisal is based on information external to the property being appraised.  The heart of any appraisal is a pained analysis of local socio-economic data, such as home ownership, wage and employment data.  This information might be important for building a 200 room hotel or locating a manufacturing facility, but that information has little to do with the small Bed and Breakfast with one part-time employee.

A second part of an appraisal includes comparable sales.  The problem here is that there are rarely sufficient comparables and the grid is subject to arbitrary judgments.  The appraiser usually winds up with inappropriate comparables (hotels) and arbitrary adjustments. 

The third part of an appraisal should include an analysis of the business and specifically of cash flow.  Some appraisers lacking knowledge of the business skip it entirely.  For those who do a business analysis, they should be credited for attempting to produce a future business profile.  However, very few appraisers have a basis for developing projections.  They usually start with current numbers and project some percentage increase over time.

A Valuation, on the other hand, is based on the existing physical plant and its resultant income capability.   It is usually “married” to a detailed and knowledgeable profit and loss statement based on current activity but depending on the current activity makes informed projections against a standard cost analysis.

Essentially, the appraisal takes external data and tries to insert a small Bed and Breakfast into a format designed for hotels and manufacturing plants.  The Valuation, on the other hand, starts with the internal workings of the Bed and Breakfast to build a cash flow capability that makes sense. 

I would venture to say that most appraisals go unread.  Despite that, many people have become slaves to the appraisal number because the bank wants it.  This diatribe will have little impact until the banks see appraisals as I do.  But if it helps a few buyers and Innkeepers to keep appraisals in perspective, it will satisfy me.



6 thoughts on “Bed and Breakfast Appraisals Versus Valuations

  1. And good luck getting any bank to accept anything other than the described, incomplete data of a B&B business beyond the traditional appraisal. We faced that as a buyer and then as an owner trying to secure financing to expand the business. Even with 5 consecutive years of business growth the bank ultimately still looked at the current real estate value of the building and land and gave cursory review of the P&L or balance sheet of the business. Bottom line, we have been successful in spite of how the banks have evaluated us as small lodging owners.

    1. George:

      Bankers latch onto appraisals like they are some super natural documents crafted by a higher hand. The reliance on appraisals is a combination of laziness and letting an appraiser do the job the banker should be doing. As you have apparently discovered, bankers are not business savvy nor do they have an entrepreneurial spirit. You have been successful in spite of the bankers.



  2. Good, valuable information. Thank you. I would be interested in seeing indepth development of this topic including specific examples of differing outcomes of each method and consequences of each.
    Does one method usually produce a higher or lower $$ figure? How much might the variations be, typically or at the extreme? Who is qualified to do each method? Relative cost?
    I imagine this could be an entire book, or at least a seminar.

    1. Thank you for your comments. It appears that appraisers tend to emphasize the real estate component of B&Bs. If the B&B is a viable business the Valuation tends to be higher. A Valuation also has much more usable information about the business. Appraisers are licensed by state and qualifications vary. The American Appraisal Institute awards status based on education and experience, granting MAI status (MAI means Made According to Instructions!). Valuations of B&Bs today follow methodology developed many years ago by me. There is no particular organization controlling Valuators.

      Feel free to call if you would like to discuss any of this in further detail.



  3. The information produced by the company that did our valuation included sufficient data that when the buyer applied for his loan, his appraiser used this data. He even complimented us on the quality and said it was his sole basis for his appraisal. The buyer had no problem getting the loan. The money spent on having this done prior to setting the listing price is well worth the cost! Make sure you hire an established company, don’t necessarily ho for the least expensive.

  4. Bingo. 100% correct. I have seen so-called Appraisers spend less than 8 minutes visit my property go a new refinance. He got out of his vehicle, took a few pictures of the outside of my home, the front of the home only, and said Thank you and left. I have a 15 acre estate, custom built luxury property with gstdend, a large greenhouse, multiple barns housing farm and exotic animals. Inside the home is an Art Gallery. Media room, Library, four bedrooms , etc, etc. Bottom line, the bank appraisal came back approx. 400k under market and 200k for Farm portion, etc. The appraisal served no purpose and the appraiser was not qualified to represent real estate. As a real estate consultant, I learned value is based on location, quality and as an Inn, uniqueness, reputation and income.

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