Feeling a bit overwhelmed by the thought of a commercial real estate appraisal? The process can be daunting, especially if you’ve never engaged in an appraisal for commercial real estate before. After all, it is a detailed activity that can look different depending on the scope and nature of your property.
To simplify and demystify the commercial appraisal process, we have addressed 19 of the most critical questions asked. So, take a deep breath, read on, and be prepared to gain a deeper insight into the vital world of commercial real estate valuation. We believe you’ll feel better informed, more confident, and maybe even more enthusiastic when scheduling a free consultation with a commercial property appraiser.
The short answer: A commercial real estate appraisal is a calculated assessment of value for any type of commercial property. Properties may include apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and land for sale. If you’re reading this article, you will likely need a commercial real estate appraisal for property being sold, mortgaged, taxed, insured, or developed. The information that arises helps enlighten those who own, manage, sell, lend money, or invest in commercial real estate property. Note: A commercial property valuation is considered the equivalent of an appraisal, and the words are sometimes used interchangeably. For the purpose of this article, we’ll mostly stick to the word “appraisal.”
A professional real estate appraiser carries out this process. Think of this person as a property detective; the commercial appraiser assembles various facts, statistics, and other information regarding the property. The data is then analyzed and used to develop opinions of value. A good commercial real estate appraiser possesses sharp analytical skills, sound judgment, and strong communication.
Depending on the types of commercial appraisals they are working on, a commercial appraiser may need to pass a test and become state-licensed or certified. Some go one step further and fulfill strenuous education and experience requirements to become designated members of the Appraisal Institute. All commercial real estate appraisers must follow a very strict code of ethics and rules. You can check the credentials of your licensed or certified commercial real estate appraiser.
So, why do you need a commercial real estate appraisal? Generally, a commercial real estate appraisal is an unbiased valuation assessment to help you determine the value of a commercial property. You may need a commercial valuation for many reasons. The most common reasons that one would need a commercial valuation are to:
You can get commercial property appraisal services on just about any property type. Below are some examples of CRE appraisals:
When it comes to appraisal, commercial property is not the only item that can be valued. There are other types of appraisal services besides commercial real estate valuation and commercial land valuation. Some commercial property appraisers may also provide you with an estate planning appraisal or commercial real estate appraisal review services. And full-service CRE firms may also help you with company valuation or commercial business valuation services.
Are commercial appraisals accurate? Typically, commercial appraisals may vary 2-3% up to 10% above or below comparable commercial real estate properties. This is based on properties that sell six months after the commercial appraisal services conclude. It’s important to note that commercial appraisal valuation is not an exact science: two commercial appraisers can look at the same property for the same purpose and come up with varying values. Those figures are valid if proper evidence and data support that commercial valuation.
The commercial real estate appraiser’s role is to produce an accurate, reliable, and unbiased estimate of the market value of a property. Market value is the most likely selling price a knowledgeable buyer would pay to a knowledgeable seller. An estimate is achieved through research, investigation, analysis, and reporting. The commercial real estate appraiser must consider everything that could affect the commercial property value; some factors include property conditions, neighborhood, economy, market conditions, legal factors, and even the political climate. Investors can place their confidence in a licensed commercial real estate appraiser, especially one who is reputable and familiar with the local market. A local commercial appraiser typically better understands commercial real estate value in the area.
A commercial property appraisal helps you determine the fair market value of your property. No matter the purpose of the appraisal, the estimated commercial valuation indicates what someone on the open market would be reasonably willing to pay for said site. Knowing the fair market value can help you determine how to price your rental fees or sale price. A commercial appraisal for real estate can help you get a better loan from a financial institution. In addition, a real estate commercial appraisal can help you better understand your financial standing. If the fair market value is greater than you anticipated, you may decide to invest in your property through upgrades, or perhaps invest elsewhere. Lastly, appraisals are important to financial institutions. A commercial property appraisal helps lenders understand the property’s value and how much they can loan.
So, what does a commercial real estate appraiser do? Continue reading to learn more.
The commercial appraisal process varies significantly depending on the nature of the project; however, the basic structure of the approach remains roughly the same across the board. First and foremost, much like a science experiment, the “problem” is identified. This may include determining the intended use, relevant characteristics of the property, and assignment conditions. Second, the scope of work necessary to solve the problem is planned out. The scope includes the amount and type of information to be researched and the analyses to be applied in an assignment. Third, relevant data is collected, verified, and analyzed. This may include market area data (general characteristics of the area/neighborhood) and comparable property data (sales, listings, offerings, vacancies, etc.).
The analysis also considers four factors: scarcity, desire, utility, and effective purchasing power. Finally, after following these steps and principles, the commercial appraiser forms an opinion of value and creates a commercial appraisal report.
In general, the full cycle of the commercial real estate appraisal process can take several days to weeks, when you factor in the inspection and subsequent investigative work. Commercial appraisal costs can vary based on the size of your property and the scope and nature of the commercial real estate appraisals. When you hire a professional to perform a commercial appraisal for real estate, they will likely walk you through the appraisal process.
How are commercial properties valued? A property’s value can be determined in various ways; however, all commercial real estate appraisal methods are built on a data foundation. That data may include details on the specific property or general information on the neighborhood, community, city, and/or region. So, what are the three ways to value a commercial real estate property?
Three main types of approaches are used when appraising commercial real estate: the cost approach, sales comparison/market approach, and income capitalization approach. Below we’ve outlined the most common commercial property appraisal methods.
To determine a final estimate, the commercial property appraiser will consider the value resulting from one of these three types of commercial appraisals for real estate. They will consider the applicability/reliability of their preferred approach, relative to the kind of property being appraised, the adequacy of the data processed, and the overall purpose of the commercial real estate appraisal. And sometimes the commercial appraiser will use multiple types of real estate appraisal methods. The types of commercial appraisal approaches that are the most reliable and applicable will bear more weight in determining the final estimate. Ask your commercial appraiser which type of appraisal method(s) they feel best suits your property.
Out of the three main approaches, which valuation approach is most common for commercial real estate? Income approach is the most commonly used commercial appraisal method when valuing a commercial property. The method estimates fair market value based on the projected income a property will generate in the future. To determine the projected income, the commercial appraiser will analyze the income that the property currently generates. The income approach gives investors the insight needed to determine if an asset is worth investing.
The income approach to appraisal is also referred to as the capitalization approach; they are synonymous. Capitalization is the division of current income by an expected rate of return to estimate the value of an income stream. As such, the determined income stream value is a gauge of fair market value.
The principle of the income approach is that an investment property’s value indicates the income it is expected to generate over its lifetime. This approach anticipates future benefits to determine present value.
The income approach is calculated by dividing the net operating income by the capitalization rate. The capitalization formula used in the income approach is called IRV: Income/Rate = Value (I/R=V).
The main advantage of the income approach method is that it provides investors with an estimate of anticipated cash flow. The main disadvantage of the income approach method is that much data is projected; a minor discrepancy can greatly affect the market value.
Your commercial appraisal report may cover a variety of important factors. These factors may include a comparative analysis of other properties in the area, a description of the property, an estimate of the property’s value, and a listing of any potential risks you may encounter. It may also include negative aspects that can impact the property’s market value.
Depending on the client’s and project’s needs and requirements, the written commercial appraisal report will vary in type, format, length, and content. The Uniform Standards of Professional Appraisal Practice determine three possible written formats. These three types of commercial real estate appraisal reports include self-contained reports, summary reports, and restricted-use reports.
If a written report isn’t necessary, a verbal opinion of value may be communicated after a preliminary analysis.
Depending on your intended use of the report, your commercial real estate appraiser can help you determine which type of commercial appraisal report makes the most sense.
Rest assured; commercial appraisers must maintain client confidentiality and cannot release the results of a report to outside parties without your permission. When scheduling the commercial real estate appraisal, you should go over who you want to use the report at its completion. For instance, you may want to share the commercial appraisal with the seller, your lender, and perhaps your local property tax appeal board. The commercial appraisal report will identify these people or parties as the only ones with the authority to use the report.
Typically, a full commercial appraisal costs $3,000 to $5,000. On average, expect to pay roughly $4,000. For larger commercial properties involved in litigation or tax cases, a commercial appraisal can cost upwards of $10,000 to $25,000. However, the commercial real estate appraisal cost can greatly vary depending on the property, requirements, intended purpose, and experience of the commercial appraiser.
The intended use of the commercial valuation is the most significant factor in determining the amount of work needed, the level of research and analysis, the detail required, and the best type of commercial appraisal report to establish the property’s market value estimate.
If you have a specific project, call commercial appraisal firms to ask, “How much is a commercial property appraisal?” Provide as many details as you can to obtain a more accurate estimate. A commercial building appraisal cost differs significantly from a land appraisal or industrial real estate appraisal.
(Note: A full commercial appraisal for real estate is sometimes referred to as a “summary appraisal report.”)
Technically, commercial appraisals don’t expire. However, a commercial appraisal is typically honored for 90 days up to six months. A commercial real estate appraisal may only be accepted for up to 30 days in a volatile market.
Fair market values can shift based on the economy, supply and demand, market volatility, the condition of your property, and the local area. Due to these variables, the shelf life of a commercial real estate appraisal can vary.
As a commercial real estate buyer or seller, it’s crucial that your commercial valuation is accurate and reflects the latest data. In addition, financial institutions may not accept your commercial real estate appraisal if they feel it’s old. And lenders may set different timeframes depending on the type of loan.
If you want a loan, we recommend you check with the financial institution you’re considering; find out their timeframe policy on accepting commercial real estate appraisals. An insider tip: You can use a commercial real estate appraiser of your choice if you engage that appraiser within 3-6 months before speaking to the bank! Otherwise, you must go through a blind bidding process through the institution’s approved vendor list for a commercial real estate appraisal.
When commercial appraisers assess a property, they analyze various factors and investigate multiple data points. The specific items appraisers look for will fluctuate depending on the type of appraisal and best-suited appraisal method.
What determines the value of a commercial property? Generally, commercial appraisers look for the following when assessing a property:
Improving your property before your commercial appraisal can increase the property’s value and attract higher-quality tenants or more buyers.
A lot of detail goes into a commercial appraisal of a project. One important aspect that people often overlook is the date selection; make sure the appraisal date is according to your needs. You may have a property appraisal as of the actual inspection date, as of a past date (retrospective appraisal), or as of a future date (prospective appraisal). Talk to your commercial real estate appraiser to decide which date makes the most sense in your case.
In addition to the date of the commercial appraisal, you must perform your own review of the appraisal. Double-check the commercial real estate appraisal information to ensure that your commercial appraiser considered every important factor. For instance, did they properly account for all the rooms in the property and their unique features? Did they cover all upgrades you made to the property? Don’t hesitate to confirm any part of your commercial real estate appraisal. Speak up to make sure the bottom line is precise.
On the flip side, you should never misrepresent facts; commercial appraisers are expert inspectors and researchers who work tirelessly to discover the true value of your property. You also shouldn’t withhold anything if your commercial appraiser asks for information. This might include drawings or blueprints of the property, a tax bill for the property, or income statements. It is in your best interest to provide all the materials you can; doing so will enable your commercial real estate appraiser to do the best and most accurate job possible.
Always remember that commercial property appraisals are estimates of value based on limited information (e.g., a commercial property appraiser will not verify the boundaries of a property; a surveyor needs to determine the property boundaries). Of this limited information, some are based on secondhand data. For instance, commercial property appraisers do not perform a walk-through of comparable properties; instead, they base their comparisons on recorded sale prices and the descriptions of the properties. Therefore, any unrecorded details affecting your property value will not be considered. Also, recorded prices of comparable properties in similar regions may differ based on the owners’ negotiation skills in buying and selling property.
Remember that when analyzing comparable properties, only the market value of the differences is considered, not their actual cost. So a proper commercial real estate appraisal will also depend on accurately assessing the market value of the differences between the appraised property and similar properties.
As you can see, there are many possible inaccuracies when conducting a commercial property valuation. As a result, the commercial appraiser may offer you a range of possible values for the property; one number is not always set in stone.
If you require an accurate assessment of the market value of your commercial property, you’ll need to hire a qualified commercial property appraiser. Depending on state laws, commercial appraisers may have an associate’s or bachelor’s degree in any field, have completed an apprenticeship under a licensed commercial appraiser, and hold a commercial appraiser certificate or license. A local commercial appraiser also has a deep understanding of the market. It’s best to find a commercial real estate appraiser near you or your property.
Don’t hesitate to ask commercial appraisers or even top commercial real estate appraisal firms for a copy of their certificate or license. You can then check with the government department that issued the qualification to confirm it is in good standing.
If you are looking for a commercial appraisal management company in Columbus, Ohio (or throughout Ohio), you will be highly satisfied with The Robert Weiler Company. We have a long history of assisting a diverse portfolio of CRE investors and property owners throughout Ohio. Our commercial appraisal management team takes the time to provide one-on-one attention to every client. Moreover, our CRE appraisers bring an unmatched skillset to the table, ensuring you can feel confident in a complete, fair, and accurate job. Whether you need a commercial real estate appraisal or commercial appraisal review services, we can help!
In need of our commercial appraisal services now? Speak with one of our experts today by calling our office at 614-221-4286. You and your team will be glad you spoke with one of our seasoned commercial real estate appraisal professionals at The Robert Weiler Company.
