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The Ultimate Guide to Commercial Real Estate Appraisals

CEO Khai Intela
If you're in the market for commercial real estate or looking to sell, understanding the appraisal process is crucial. Commercial real estate appraisals help determine the value of a property and play a vital role...

If you're in the market for commercial real estate or looking to sell, understanding the appraisal process is crucial. Commercial real estate appraisals help determine the value of a property and play a vital role in various transactions, such as buying or selling, securing financing, settling estates, and more. In this comprehensive guide, we'll explore what commercial real estate appraisers do, the different appraisal approaches they use, the accuracy of appraisals, and how to find reputable appraisal companies.

What Does a Commercial Real Estate Appraiser Do?

Commercial real estate appraisers specialize in assessing the value of different types of commercial properties. Their expertise is essential for various purposes, including determining property prices, supporting loan underwriting decisions, resolving tax disputes, assisting with lease negotiations, and providing valuable insights for business dissolution or feasibility studies.

Apartment buildings and complexes require the best real estate appraiser companies Apartment buildings and complexes require the best real estate appraiser companies

The Overall Commercial Real Estate Appraisal Process

Commercial real estate appraisers evaluate a multitude of factors when assessing a property. They consider its intended use, relevant characteristics, and any third-party assignments. They then scope out the work and determine the necessary information and analysis. Key factors like utility, scarcity, and effective purchasing power are assessed to form an opinion about the property's value. Finally, an appraisal report is written, summarizing the appraiser's findings and conclusions. The process can take anywhere from a few days to several weeks, depending on the complexity of the property.

Approaches Used for Commercial Real Estate Appraisal

Commercial real estate appraisers utilize different approaches to value a property, ensuring a comprehensive assessment. The three main approaches commonly used are:

Income Capitalization Approach

This approach focuses on a property's income-generating potential. Using the property's net operating income (NOI) and the cap rate (required return), appraisers determine its value. The cap rate considers factors like tenant creditworthiness, lease length, supply and demand fundamentals, and economic factors. The income capitalization approach is typically used for office buildings, shopping centers, and apartment buildings.

Cost Approach

The cost approach involves calculating the cost of constructing a building from scratch or replicating an existing one. The market price of the building is then determined based on the cost of land, construction, and depreciation. While this approach is most accurate for new properties, it may also be used for unique properties lacking comparable sales. Appraisers often combine the cost approach with the income capitalization approach to fine-tune the property's value.

Sale Comparison/Market Approach

The sale comparison approach relies on recently sold comparable properties to determine the value of a property. Commercial real estate appraisers consider size, condition, location, and floor plan differences between the subject property and the comparables. This approach provides insights into current market values and helps ensure a fair assessment.

Commercial real estate appraisers often combine these approaches, weighting their findings based on the property type, to provide a comprehensive valuation.

How Accurate Are Commercial Real Estate Appraisals?

Commercial real estate appraisals, on average, can deviate by approximately 12% above or below the subsequent property sales price. However, when looking at portfolios of properties, appraisals show a much lower average discrepancy of about 4% to 5%. Factors such as market conditions and the expertise of the appraiser influence the accuracy of the appraisal. Selecting an appraiser with years of experience, the necessary credentials, and a membership with the Appraisal Institute (MAI) significantly increases the likelihood of a more accurate appraisal.

Tips for Hiring a Commercial Real Estate Appraiser

When searching for a reliable commercial real estate appraiser, keep the following factors in mind:

Bona Fides

Look for appraisers with at least 5 to 10 years of experience in the geographic area of interest. Appraisers who are MAIs have additional education and experience beyond state requirements, making them ideal candidates for high-end commercial financing. Ensure the appraiser has no personal interest in the property being evaluated to maintain objectivity.

Transparency

A reputable appraiser should provide a transparent appraisal report, highlighting any assumptions made during the valuation process. Appraisers should disclose any deviations from standard practices or extraordinary measures taken.

Highest and Best Use

The appraiser should assess the property's highest and best use, considering factors like legal, financial, and physical feasibility. This evaluation may result in a property value that differs from the "as-is" value.

Appropriateness

The appraisal report should align with the objectives of the buyer, seller, or lender. The appraiser should conduct thorough research and analysis appropriate to the specific property type and the purpose of the appraisal.

Finding Quality Real Estate Appraisal Companies

To find reputable commercial real estate appraisal companies, start by checking for MAIs certified by the Appraisal Institute. Utilize their search tool to locate appraisers near you. Additionally, your loan broker can provide recommendations based on their experience working with reliable appraisal providers. At Assets America®, we are always here to discuss your specific requirements and assist you in finding the right commercial real estate appraisal services.

Conclusion

Commercial real estate appraisals are an integral part of the buying, selling, and financing processes. Understanding the appraisal process, the different approaches used, and the factors that influence accuracy can help you make more informed decisions. By hiring a reputable and experienced commercial real estate appraiser, you can ensure a fair and accurate valuation of your property.

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