How accurate are commercial real estate appraisals?

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Property owners are often surprised to know that the appraisal procedures between residential and commercial real estate differ. It can be more complicated, technical, and will most likely need more time and resources to request and complete.

If you are an owner of a commercial property, having it appraised by a trustworthy professional will give you peace of mind when it comes to knowing the value of your property in the market and will also be helpful if you are planning to get a mortgage, loan, or insurance. Of course, it is understandable that you would want a fair value to what you own, which can make you wonder about the accuracy of commercial appraisals. How accurate are they, really?

What do commercial real estate appraisals mean?

When a commercial real estate appraisal is requested by an independent owner, bank, or lender, it will be done by a registered commercial appraiser in the area. They are the professionals that are specifically trained and licensed to put value in properties, and in this case, a commercial one. 

 

 

 

 

Compared to a residential real estate property that includes single family homes or up to four-unit residences, commercial real estate properties are those that have more than five units of residence and other profitable buildings that can be used to generate income such as condo units and hotels. 

It is also possible for a potential buyer to order a commercial appraisal for a property that they are interested in buying as an added protection and to assess whether it is just as profitable as what its seller might have guaranteed.

Are commercial real estate appraisals accurate?

Just like other kinds of appraisals, commercial real estate appraisal is also considered an art and not an exact science, which would mean that it could be subjective to your appraiser’s eyes. To make it simple to understand, it would be like this: If you hire three different appraisers to assess the value of your home, there is a high chance that they will arrive with three different results. 

However, although there might be some slight differences, appraisers use tools and relevant data such as the CMA or the Comparative Market Analysis that will help them come with a value that is accurate or close to 100% accuracy. If there is a difference, it can be off positively or negatively by a value of around 10% to 12% by average. This means that the amount that your appraiser might give you could be worth less than 10% to 12% or more than those same percentages.

How is commercial real estate appraised?

Commercial real estate appraisals are considered to be more thorough than residential appraisals. The appraiser that was assigned to your property will do an inspection of your building, both its interiors and exteriors, taking note of its condition, features, and other important data. 

 

 

 

 

Aside from the state of the property itself, there will also be some calculations that need to be done to determine the expected profit and income of the commercial estate per month or year, while taking into consideration the possibility that some issues with tenants that do not pay, repair costs, and many more.

Properties can be evaluated using various approaches, such as the cost approach, sales comparison approach, and income capitalization approach. Depending on your property, your appraiser would opt to use one or a combination of these approaches for them to be able to provide a more accurate appraisal report.

If you are the owner of the commercial property, you should be prepared to answer some questions and to provide some documents that will contain income statements, bills, and other data if the appraiser requests to see them. This is just to help them get an accurate value, and your cooperation will be appreciated. After all, appraisers are third-party professionals, and will not be biased or unfair. All they have to do is inspect your building, analyze, compare, assess, and make a report that will contain your property’s value including several important details.

Which valuation approach is most commonly used for commercial real estate?

Have you ever heard the cost approach, sales comparison approach, and income capitalization approach?

As mentioned earlier, there are three most common valuation approaches that can be used to appraise a particular property. These approaches are determined and used by the licensed appraiser that was assigned to put value in your commercial estate. Because they are different from each other, they can be utilized in various situations and property types, and can also be used together for a more accurate result.

The cost approach can be good in determining the value of a property by taking into account how much it would cost to build the same one with the cost of land, materials, and labor added into the computation.  This type of approach is not often partnered with commercial properties as they would work best in estates that do not yield income. 

The sales comparison approach or market approach is used by comparing a commercial building to other properties that may have the same functions, location, rooms, size, and other similar features that were recently sold at the market. This type of approach is considered to be reliable, which is why it is popularly used for various types of property. Due to this reason, the market approach could be a tool used by appraisers to put a value on commercial real estate. 

Lastly, the income capitalization approach is the approach that most appraisers use when appraising commercial real estate. This is because it is very important to determine whether a commercial property will be able to generate revenue or income that will be advantageous to its buyer or investor, or if it will result in a significant loss in resources. This type of approach takes more time to finish and is more difficult to do, as there are many factors that will need to be included and calculated, such as the expected cash flow and risks that come with operating the commercial property.

Important things you need to know about commercial real estate appraisals

Are you planning to get financing? Or maybe you are thinking of selling your commercial property? If this is the case, it would not hurt to do your research and be prepared for the appraisal process. Understandably, owners would more often like a higher appraisal amount on their property especially if they want to sell it, and this could only be possible if your building is in great condition and has a high potential for earning profits. 

 

 

 

 

 

Listed below are the most frequently asked questions concerning commercial real estate appraisals and some tips to make the whole process less bumpy for you as its owner.

How long do commercial appraisals take?

There is no particular way to determine how long it would exactly take your appraiser to do their inspection on your property. In most cases, an hour would be enough, but it could take longer especially if the building is huge and complex. After the inspection, the appraiser would need days and sometimes weeks to analyze your property and compare it with other properties with similar features. 

It is expected that commercial appraisals would take longer than residential appraisals due to the need to calculate profits and risks in running and making the building operational. If you are having your commercial real estate appraised, it would be wise to clear your schedule during the visitation date.

How much should a commercial appraisal cost?

Commercial real estate appraisal costs would vary where you live. In the United States, they would cost $4,000 on average. Smaller and less complex properties can be charged $2,000 while bigger commercial properties that generate more income could cost around $10,000 to $25,000 to appraise.

The cost of getting a commercial real estate appraisal is considerably expensive and would often be paid by the owner of the property, even if it was their bank or lender who requested it. 

In some cases, you may not even be given a copy of the appraisal report once it is done, depending on your agreement with your bank or lender. This is applicable to property owners who are requesting a loan or mortgage. If you want to make sure that you will also be allowed to take a look into the result, settle it with your bank or lender before agreeing to the appraisal. However, if this applies to you, you should not doubt your appraiser, as they would strictly follow the Uniform Standards of Professional Appraisal Practice (USPAP) code of ethics for a fair and ethical appraisal procedure. This means that appraisers are only doing their job, which is to set a value to your property, in an unbiased and precise manner. 

How long is a commercial appraisal valid?

Commercial appraisals usually do not get expired, however, if you are getting your property appraised for loan and financing reasons, your bank or private lender may not accept them if 3 months have passed after the date that you got your report. 

Before ordering an appraisal, make sure that you are ready to submit them after you receive the results. It would also be helpful to ask your lender their deadline in the submission of the report to avoid spending money to have your property reappraised. 

The reason why lenders would more likely not accept reports that are past 90 days is that there is a high chance that it is no longer accurate, given that the market could always change.

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