HOW IS COMMERCIAL REAL ESTATE APPRAISED?

A commercial real estate appraisal is a value assessment on an income-generating property that is performed by a third-party professional appraiser. This type of appraisal is a property valuation on any kind of commercial real estate, including office buildings, multifamily apartment buildings, condominiums, industrial buildings, and retail buildings.

This type of assessment is often a prerequisite for the sale or purchase of a property or may be used for financing purposes. It should represent the unbiased opinion of the appraiser, and the appraiser should be licensed in their field of appraisal. The assessment itself will typically entail extensive analysis of the property through physical inspection combined with research about the surrounding market and its values. After taking these criteria into consideration, a monetary value will be assigned to the property, signifying its commercial worth.

Brokers, agents, owners, and investors use appraisals to determine a property’s market value. Before real estate investors receive approval for a loan to buy any type of commercial real estate, they need to attain a commercial real estate appraisal of the subject property.

 

Who conducts a commercial real estate appraisal?

A commercial real estate appraiser is a qualified professional who has experience estimating the value of commercial properties. The appraiser will visit the property and inspect it, taking photos, videos, and notes. They will also research recent sales of similar properties in the area to develop a fair estimate of the property’s value.

 

How does a commercial real estate appraiser determine the value of a commercial property?

The appraiser will consider several factors when estimating the value of a commercial property, including:

 

• The location of the property

Like most real estate sales, commercial real estate location will be a significant factor in its value. The appraiser will consider the surrounding area, the property’s access to transportation and amenities, and any potential zoning changes that could affect the property’s value.

 

• The condition of the property

If the commercial property’s condition is poor, it will likely be valued lower than a similar property in good condition. The appraiser will take photos and notes of any damage or repairs that need to be made.

 

• The size of the property

The commercial property’s size is another critical factor that will affect its value. The appraiser will measure the property’s square footage and compare it to similar properties in the area.

 

• The type of commercial property

Different types of commercial properties are valued differently. For example, an office building will be valued differently than a retail store. The appraiser will consider the type of property when estimating its value.

 

• Recent sales of similar properties

When appraising commercial real estate, the appraiser will research recent sales of comparable properties in the area.

 

• The commercial real estate market

The current state of the commercial real estate market will also be considered when estimating the value of a property. If the market is strong, the property will likely be valued higher than if the market is weak.

 

 

Why Is a Commercial Real Estate Appraisal Important?

A commercial property appraisal is an important step in the real estate buying process. Below are reasons why a commercial real estate appraisal is important. Commercial real estate appraisals;

 

• Confirms current market value.
• Helps buyers and sellers decide on the prices they will bid or offer.
• Gives an underwriter the basis for sizing a loan offer.
• Disputing tax assessments and appeals of tax assessments.
• Supports lease negotiations.
• Estimates the liquidation value for forced sale or auction proceedings.
• Ascertains the feasibility of a construction or renovation program.
• Supports the price paid by the government on the acquisition of private property for public use.
• Updates the fair market value of a property.
• Assesses damages created by weather conditions or environmental contamination and establishes the replacement cost.
• Helps owners decide whether or not it’s time to sell a property.

 

The Overall Commercial Real Estate Appraisal Process

Commercial real estate appraisers must be skilled at evaluating a wide variety of property types. That means, at a high level, the commercial real estate appraiser must:

 

• Understand the property’s intended use, its relevant characteristics, and whether it is under assignment to third parties.
• Scope out the work, including the type of information and analysis required.
•  Assess key factors, including utility, desire, scarcity, and effective purchasing power.
• Form an opinion about the property’s value.
• Write an appraisal report.

 

Approaches to Appraising Commercial Real Estate Properties

A property’s value can be determined in diverse ways, however, all commercial real estate appraisal methods are built on a foundation of data. That data may include details on the specific property or general information on the neighborhood, community, city, and/or region.

There are three main types of approaches used when appraising commercial real estate: the cost approach, sales comparison/market approach, and income capitalization approach. 

 

• Cost Approach 

According to the cost approach method of property appraisal, the value of commercial realty should equal the current expenses required to replicate the structure exactly, taking into account additional variables such as depreciation and land value. In areas of high property density, it is quite likely that the land value will figure prominently when calculating commercial real estate values using the cost approach. 

Depending upon the specifics of the structure in question, the value of the building itself may not factor as prominently into the overall appraisal value as the land value when using the cost approach. The cost approach is often used to appraise new properties and unique properties with few comparable sales.

 

•  Market Approach 

Unlike the cost approach, which focuses predominantly on the literal value of the structure in question and the land it sits on, the market approach is fundamentally derived from an analysis of the value of properties in the immediate area of a similar size and function. This method speculates that an investor will pay only what similar properties have sold for. As such, the market approach is rooted in which property features are alike and the costs associated with those features

It does not matter specifically what method of appraisal has been used to determine the value of these neighboring properties, and instead relies almost exclusively on the fair market value of the properties themselves. As could be expected, using the market approach will likely result in a variety of pricing fluctuations if and when the relative demand in the property market shifts.  Many in the commercial real estate appraisal industry believe this is a more accurate approach because the current market value is taken into account.

 

• Income Capitalization Approach 

Using the income capitalization approach, real estate appraisers divide the net operating income of a property, also explained as all of the revenue generated by the property, by its current market value. This tactic involves a rationalization of the income that a property may generate over time. Appraisers commonly use this method for properties such as shopping centers, office buildings, and large apartment buildings, which have a strong earning ability.

The income capitalization approach to appraisal is widely considered to be an excellent benchmark by which real estate investors can assess the attractiveness of a property according to their own standards. For example, if a commercial real estate investment group considers a capitalization rate of 10 percent or, in other words, a revenue-to-market value ratio of 1:10 to be their ideal, this numerical calculation method will allow them to quickly assess the viability of properties quickly and efficiently.

To determine a final estimate, the property appraiser will consider the value that results from one of these three types of commercial appraisals. They will take into consideration the applicability/reliability of their preferred approach, relative to the kind of property being appraised, the adequacy of the data processing, and the overall purpose of the commercial real estate appraisal.

 

 

Who can see the results of the commercial appraisal report?

The commercial appraisal report is a confidential document. This means that it can only be seen by the parties involved in the transaction. This includes the borrower, the lender, and the appraiser. The report will not be made available to the public. Appraisers must maintain client confidentiality and cannot release the results of a report to outside parties without your permission.

 

Residential vs. Commercial Property Appraisals

While commercial and residential real estate appraisals may seem similar, there are some important differences that you should be aware of.

 

• Commercial appraisals are generally more complex than residential appraisals. This is because commercial properties can be used for a wide variety of purposes, making it difficult to compare them to other properties.
• Commercial appraisals typically take longer to complete than residential appraisals. This is because there is usually more data that needs to be collected and analyzed.
• Commercial appraisals often require the use of specialized knowledge and skills. This is because commercial properties can be very complex, and they often involve unique features that require a deep understanding of the market.

 

CONCLUSION

Commercial real estate appraisal is a complex process. It is important to work with an experienced appraiser who understands the market and the particular property you are interested in. There are a few different ways to find a commercial real estate appraiser. You can search online or ask for recommendations from commercial real estate professionals. Be sure that you use a professional appraisal practice that is licensed. Also, remember that the valuation is only an estimate of the property’s value. It is not guaranteed, and the actual sale price may be higher or lower than the appraised value.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.