6 Key Things to Learn About Commercial Real Estate AppraisalPosted:
Facing your first commercial real estate appraisal is an overwhelming experience. It’s a very involved process that you may not fully understand.
The good news is, we’re here to help. To make your life easier, we’ve made a concise yet comprehensive list to answer your biggest appraisal questions.
What exactly is a commercial real estate appraisal? Who performs it and why? How do you know you can trust the appraiser?
All these questions and more are answered below. Read on to be fully prepared for your upcoming appraisal.
1. What Is a Commercial Real Estate Appraisal?
A commercial real estate appraisal is a professional, meticulous assessment of how valuable a commercial property is. It is also called a “commercial property valuation.”
The types of properties that are commonly appraised include apartment complexes, hotels, condos, shopping malls, office buildings, industrial sites, and land lots. When commercial properties are bought and sold, an appraisal is done so that all parties involved have an accurate idea of the property’s value.
2. When Does Commercial Real Estate Need To Be Appraised?
Other than buying and selling, here are some other reasons a commercial property is appraised.
- To help sellers decide an appropriate price
- To help buyers determine an appropriate bid
- To help owners and tenants determine an appropriate lease
- When a property is being mortgaged, an appraisal helps the underwriter determine a value of security
- For tax assessment purposes and appeals of tax assessments
- For determining value during business mergers/acquisitions or government acquisitions
- To assess property damage for an insurance claim
- To help plan and budget a remodel, renovation, or other construction project
- To help investors plan their investments in the property or company that owns it
Basically, any time the property is being bought, sold, leased, insured, taxed, acquired, mortgaged, or invested in, a commercial real estate appraisal will be performed.
3. Who Performs the Commercial Real Estate Appraisal?
The appraisal is performed by a professional commercial real estate appraiser. The appraiser may belong to a company like this but is often an independent contractor.
The appraiser uses their extensive knowledge of property valuation, along with their math and communication skills, to calculate the true value of the property. They’ll need to have a keen eye for detail so they miss nothing during their inspection. They’ll also ask questions about value-affecting factors that aren’t obvious by a visual inspection alone.
4. How Do You Know You Can Trust Your Appraiser?
We’ve all been there. An independent contractor takes advantage of our lack of knowledge to bamboozle us out of what’s rightfully ours.
Only, this time, it’s not an oil change or a residential HVAC repair job. It’s a commercial real estate appraisal concerning at least tens of thousands, maybe millions, of dollars.
Fortunately, with stakes this high, our government’s got measures in place to make sure this type of swindling doesn’t happen. First of all, appraisers are required by law to conform to the Uniform Standards of Professional Appraisal Practice.
Second, certain locations and types of appraisals require appraisers to be licensed or otherwise certified by the state. You can check easily enough that the appraiser has all the required credentials.
Furthermore, you can also check if the appraiser has gone above and beyond to earn additional credentials. See if they have any awards and/or memberships to nationally-recognized appraisal associations like the Appraisal Institute.
5. What Is Involved in the Commercial Real Estate Appraisal Process?
Just like with residential real estate appraisals, a main component of the process is the on-site inspection. This may take several hours or less than one. It depends on the size and complexity of the property.
The appraiser does a thorough walkthrough of the property, noting any problems along the way. They record a checklist of the property’s amenities and features, their typical use and maintenance, and their condition.
Appraisers also research the official documents of the building including zoning records and ownership deeds. They’ll also judge the property against comparable sales in recent history.
Lastly, they write up their official report based on the information they’ve collected. The whole process will likely take several days or weeks to finish.
6. What Types of Commercial Appraisals Are There?
There are three main methods commonly used to determine a commercial property’s value. Here they are, listed in detail.
This appraisal approach is sort of questionable and not very popular these days. The cost approach declares that the value of the property is equal to the cost of constructing an exact duplicate.
While the cost method does account for depreciation, most people agree that it still relies far too much on guesswork. For example, the location itself, not the property built on it, has value of its own.
This value is likely determined, in part, by the building that’s been sitting there for years. So, using the cost approach, how do you account for the value of the location independent of what’s constructed on it?
Because the cost approach leaves too many questions unanswered, it’s rarely used except to appraise new properties
Sales Comparison Approach
As its name suggests, this approach is based on the comparison of similar sales. That is, the appraiser compares the sale prices of similar properties in the same market area to determine the value. They’ll take into account the properties’ amenities, size, location, age, condition, etc. to find comparable sale prices.
This is also called the market data approach. Most who deal in commercial real estate consider this a very accurate approach.
Income Capitalization Approach
This approach bases the current value of a property on the future income the property is expected to make. Appraisers take into account not only the expected income but also any risks involved in achieving this income. They then use this prediction as the basis of the property’s current value estimate.
People like this approach because it’s so similar, if not exactly the same, as when a business calculates future sales projections. This is the same type of accurate and trustworthy predictions that companies base all of their business strategies on.
Keep This Complete Commercial Real Estate Appraisal Guide
If you’re facing your very first commercial real estate appraisal, remember what you’ve learned here today. Now that you know what to expect, you won’t be intimidated or caught unawares. Use the knowledge you’ve gained here to get you through any current or future appraisals you may experience.
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