How Accurate and Correct is Your Commercial Real Estate Appraisal?

How Accurate and Correct is Your Commercial Real Estate Appraisal?

Just how precise is the appraisal that has been presented to you?  The response is, "It depends."  The role of the licensed residential appraiser is to produce a reliable estimate of market value.  It must be precise and reliable. The envisioned use drives the type of work, level of detail, and study along with the type of report used to carry the market worth estimate. Market value, in simple terms, is the most credible selling price a willing purchaser would pay to a willing seller with both parties being suitably informed and neither party acting under duress. In making an appraisal and the subsequent report, the appraiser should examine, reveal, describe, study and report.  In all of this, the appraiser must consider everything that could affect the worth of the property including lawful, economic, political, and market conditions.

There are two types of appraisal - complete and summary. The whole version has all of the info, examination, and conclusions. The summary version is a shortened format. Which report is suitable is based upon the intended use and choice of the appraisal.

The Complete Appraisal Report must contain all sides of the appraisal such as the identification of the property, drive, and function of the appraisal, pictures, site and building description, descriptive economic and demographic info, area description, neighborhood description, and highest and best use of the property.  

There are three methods to valuing property: They are the Cost Approach, Sales Comparison Approach, and Income Approach. These methods are followed by the Understanding of Values and the Final Value Estimate.

The Cost Method

When implementing the appraisal with cost method, appraisers accept that the worth of a property is equivalent to the replacement cost of the constructions on the property (minus depreciation) plus the market value of the property itself. This process needs outstanding information on material costs and construction. While the cost technique can offer some idea of a property’s value, it does not sufficiently capture many of the tones of commercial real estate. For instance, a hotel built in an unreachable location may be worth far less than the cost of substituting the building since potential buyers would likely view it as a poor asset. While it is the slightest normally used approach, the cost method offers appraisers a tool that can help evaluate certain features of a property.


The Sales Comparison Method

When using the sales comparison process, appraisers seek out freshly sold properties with alike characteristics in the same section as the property being appraised, then associate the properties; subtracting and increasing worth for comparative lacks or advantages. The more comparable sales that can be found, the stronger the final analysis. This technique is operative for evaluating an extensive variety of real estate, so long as there is an adequate number of comparable properties obtainable to specify true trends in the market. If the market is weak and there are few comparables accessible, the usefulness of this technique is limited. However, when used in combination with other approaches the sales comparison technique can be a useful tool for deriving the value of a property.

The Income Capitalization Method

The income capitalization method utilizes a series of calculations to change the potential income of a property into an estimate of its worth. It is usually used for appraising commercial buildings such as workplaces and shopping centers, or properties with natural assets such as timber that can be collected for income. The objective of this method is to estimate the current value of expected future benefits. In the case of commercial real estate, ‘value’ may be defined as the current worth of all future aids to be extracted from a property. The core problem with this technique is that appraisers cannot always pledge the future worth of goods and services since prices vary over time. Yet, this the income capitalization method delivers many visions when evaluating the value of commercial real estate, particularly when paired with other methods.

Commercial Real Estate Valuation

Calculating commercial property value is much dissimilar to calculating the value of the residential real estate—even for the most skillful appraisers.

With residential, most appraisers can look at comps in the neighborhood as a zero, then add or subtract to a property’s worth grounded on precise criteria like square footage, number of bedrooms, and so forth.

CRE valuation is an entirely different ball game, though, and is a much more complex beast. Yet, it’s still helpful to the CRE process.


The Importance of Commercial Property Valuation

Knowing the worth of commercial property is significant for numerous reasons and several parties.

At the most simple level, the value tells you the most probable price the asset would sell for present-day on the open market.

The value is also vital when it comes to endorsing. Most people don’t understand that getting an appraisal is not an obligatory part of a purchase or sale. It’s normally required when placing debt on a property. You have to know the importance of appraisal before taking it.

In commercial real estate, most investors want to see at least a 65% to 70% loan-to-value ratio before signing off on a loan. An appraisal gives you that “value” starting point on which the lender decides how much debt it is willing to deliver.

There are some things to know before you choose a real estate appraisal.

1.  Credentials, character, and ethics of the appraisers.  The appraiser must have at least 5 years' experience for the simple commercial appraisals (a small mixed-use property) and more than 10 years for the higher end or complex commercial appraisals.  Experience also means the appraiser mentored under or worked under an MAI or MAI correspondent appraiser.  Additionally, the appraiser must validate competence geographically.

2.  Any hypothetical or extraordinary molds used in the appraisal.  This might be something such as value upon conclusion of a building on empty land, for example.  The appraisal should highly display either of these, and the reader should take careful note.

3.  Highest and Best Use - A shortened description would be that legal, reasonable, physically possible, and financially possible use that would give the property its uppermost return or value. Appraising a property grounded upon its highest and best use could give a greatly different value indication than appraising the same property, "as is."

4.  Intended Use/User - this is the user the appraiser proposes the appraisal report to be used by and what the intended use is.  The envisioned use drives the scope of work within the appraisal.

5.  Choice of appraisal is essential for it describes the level and depth of research and analysis.  Scope of work comprises the degree to which the property is examined and identified, the amount of research into physical or economic factors that could affect the property, the amount of data research, and the type and extent of examination applied to arrive at thoughts or conclusions.

6.  Subject property identification and property description:  Not only double-check the street address, but also the tax or parcel ID #.  It must also include the kind of building, square foot area, date of the building, quality of structure, effective age, number of rooms, rent rolls, any other relative facilities, and that suitable market data comparables were used. 

7.  At the end of the appraisal, the appraiser will merge what was done, what methods were used, and what the final value decision is.  In that segment, the reasoning and the final value assumption will be summarized.

8. Did the appraiser do anything "out of the normal" or something that diverged from common and suitable appraisal practices?

9.  The appraiser must not be partial and must confirm that he has no concern, present or future in the outcomes of the appraisal. You can choose a company that provides nationwide property and appraisal services so there would be zero percent chance of any doubt.

In the final study, it is the command of the appraiser to produce a reasonable and defendable appraisal of market value. When all appraisers involved attempt for this goal, the alterations between the two appraisals should not be significant.



As you can see, there are manifold conducts to value commercial property. Truth be told, an appraiser usually uses more than one approach and then takes an average of the methods to regulate the value of a property.

Any real estate investor or appraiser needs to comprehend the main efforts into these equations to truly know the value of a property. You have to choose a real estate broker, agent, and appraiser carefully to get a good value for your home.

There’s a bit of a learning curve related to appraisals, but each time you analyze a property’s value it gets easier.

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