A Real Walkthrough of the Commercial Real Estate Appraisal
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
In commercial real estate, the learning never truly stops. Whether it’s your 1st deal or your 100th deal, there’s always something new to understand. Of course, if you’ve been buying properties for a while, chances are good that you’re already familiar with a commercial real estate appraisal.
The truth is that the New Year is a great time to go back to the fundamentals. We’ve all been there: the rush of a new deal gets us excited, and we tend to skip right over the very things that we need to pay extra attention to, especially when a deal feels too good to be true.
Flying blind rarely gets you to the type of portfolio that generates serious passive income, so what does it really take? Going back to the basics, a CRE appraisal is a basic building block of a commercial property deal. Let’s get into it.
What Does a Commercial Real Estate Appraisal Provide?
The overall goal of an appraisal is to provide you with your property’s "true value." This is based on a wide range of detailed data points. For example, it goes far beyond just looking at where the property is located, though that is certainly part of the value.
Appraising commercial property comes through one of three methods: the cost approach, the income capitalization approach, and the sales comparison approach.
This is where the expertise of the appraiser really shines because each approach has its own merits. For example, if a property has great income generation, the income capitalization approach would be a better path than just the cost approach.
However, if you’re trying to customize your insurance options on your building, the cost approach would give you more data to back up your case.
Who Completes the Appraisal?
Not just anyone can provide an appraisal that will hold up in the eyes of lenders, buyers, sellers, and even the court system. An appraisal is carried out by a licensed real estate appraiser. This licensing is done at the state level, and every state has differing requirements.
However, there is some common overlap across states, including the active training requirement. California even has four different levels of real estate appraisers.
Appraisers have to apprentice under a fully licensed and actively working supervisor appraiser in order to learn the business properly and become licensed themselves in the future. They also have to take multiple courses designed to educate them on the state and federal laws around real estate appraisals.
Handling the Appraisal Fees
Appraisals vary, but we have to be upfront here: this is not a small expense. Whereas a residential appraisal can be as little as a few hundred dollars, their commercial counterpart ranges more in the $2500+ range. The more complex the appraisal, the more that it will cost you.
Having your own appraisal gives you important ammo within the deal. For buyers, it means that you can line up better financing because you have a certified professional attesting to the value of the property, based on hard data and their own expertise.
For sellers, holding up an appraisal report confirms that you are aware of how much the property is worth. This can help in a heated negotiation, as it gives the buyer proof that you aren’t just picking an arbitrary amount for your listing price.
Tricky Situations That Call For Appraisals
Keep in mind that appraisals aren’t just important for the buying or selling of commercial property. It can come in handy when you are trying to address a tax assessment that you feel isn’t correct. The appraisal that you get can be used as proof in your appeal case.
If you’re looking at trying to renovate a commercial property, knowing the appraised value helps you make more calculated decisions. It goes without saying that renovating an entire commercial building is a considerable investment. However, if the appraisal helps support the case for moving forward with the renovation, then it’s well worth taking the time for the report.
Given how much information has to be collected, cleaned, analyzed, and presented, it’s important to keep in mind that the appraisal document can take four to six weeks to complete. If you don’t provide documents in a timely fashion when requested, then it can take even longer. Keep that in mind as you are working through your deals.
Other Considerations to Make For Appraisals
It is important to place appraisals in the proper context, especially when you’re lining up a deal. This makes sense whether you’re buying a property, or selling a property. The appraisal is based on the appraiser’s best estimates, which are based on looking at multiple factors.
For example, the location of your property can affect the appraisal. Makes sense, since the general consensus of real estate is that it’s all about location, location, location.
Yet it goes so much deeper than that, as every commercial property is unique. This is where they differ from residential appraisals since it’s much easier to find comparable homes than it is to find comparable pieces of commercial property.
You Still Need an Inspection
An appraisal is not an inspection; the two activities are completely different. You will need a qualified inspector well versed in commercial real estate. Working with a professional that’s done commercial property before is extremely important. As you might imagine, there is a lot more area to cover with commercial buildings compared to their residential counterparts.
Think of it this way: the inspection is one item on your checklist, and the appraisal is yet another item on your checklist. You have a lot of things to handle on your list before you can move to the finish line.
The Road Ahead
We think that getting commercial real estate appraisals is always a good idea. The appraised value of the property is used in a wide variety of real estate calculations. Building multiple sources of data around a property gives you a better idea in terms of whether or not you actually want to purchase the property or not.
If you want this year to be the best for your property acquisitions, it doesn’t hurt to make appraisals more of a priority this year.
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