Business owners often find that they are in need of a commercial real estate appraisal for a variety of reasons: to establish the valuation for mortgages or other loans, determine an appropriate sale price, or for property insurance. Many also find that the appraisal process itself throws them for a loop, as it is quite different from the appraisal process for a residential property. Commercial real estate appraisals are more subjective in nature, as they are based not only on the monetary value of the property, but also on how much income a given property will be able to generate.
Because there is a bit of a learning curve for business owners when it comes to commercial real estate appraisals, we have put together a list of the top 6 things you should know:
1. The inspection is only the beginning
An appraiser will visit the property being valued to conduct an inspection, which can last several hours depending on the complexity of the property. This is the first part of the appraisal process, as additional data on public ownership, zoning records, demographics of the neighborhood, replacement costs, rentals, and comparable sales also need to be compiled and analyzed. Once this is complete, the findings are presented in an appraisal report that can be as lengthy as 100 pages.
2. Be truthful and forthcoming
Appraisers are always going to be one step ahead of you, as they need to ensure they present—as accurately as possible—a valuation for your property. They may be required to defend their opinion if they are ever brought to court, and so will verify anything that you tell them using other sources. It is also important to be forthcoming with any documents an appraiser asks for in order to complete their review. These may include income tax statements, blueprints, and property tax bills. The appraiser is bound by client confidentiality, so they will not divulge any information from these documents. Withholding these documents will only delay the appraisal process.
3. The appraisal report is confidential
In addition to the client confidentiality noted above, unless you indicate otherwise, the appraiser is not at liberty to share the contents of your report with anyone besides the intended user. If there are specific individuals you wish to share the contents of the appraisal report with, you should advise the appraiser so that they can add those individuals to the report.
4. Appraiser must adhere to a strict code of ethics
Appraisers must follow the Uniform Standards of Professional Appraisal Practice in order to provide an unbiased opinion on the value of your commercial property. If the appraiser fails to do so, it may result in disciplinary action from the state, and potential revocation of their license.
5. Establishing a date for the valuation
Consultation with your appraiser is important for this step. Appraisers have options when it comes to establishing a date for the valuation. The property can either be appraised as on the date of the inspection, as on a past date (retrospective appraisal), or as on a future date (prospective appraisal).
6. Approaches to calculating value
Commercial appraisals rely on one or more approaches to value a property. Let’s take a look at the following three options:
- A direct comparison approach is when the appraiser analyzes sales data on recently sold comparable properties in the same market area. The challenge with this approach is that no two commercial properties are exactly alike.
- The cost approach estimates the market value of the land, and adds the depreciated value of the improvements. This approach is preferred for unique, one-of-a-kind properties.
- The income approach is used to appraise income generating properties like apartment buildings and hotels. It takes into account future income-generating capacity. The value is calculated by dividing the net operating income by the rate of return expected on the property being appraised.
If you are in need of a real estate appraiser, Appraisals Unlimited is here to help you. Our experienced appraisers can assist in securing an accurate property valuation with a quick turnaround. We offer commercial real estate appraisals, as well as residential appraisals in the Northeast. Please contact us today, or order an appraisal online!
If you have an immediate need for a commercial or residential real estate appraisal, fill out the brief form below or order an appraisal online. We are the most trusted appraisal company in New England and New Jersey, performing more than 10,000 appraisals every year!
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