You’ve been asked by your lender, lawyer, accountant or business partner to obtain a commercial real estate appraisal for your commercial property.
Once an appraiser is engaged to conduct a commercial appraisal, what do you need to know as a property owner?
Here are six of the most important things to know about commercial appraisals, from finding an appraiser and the appraisal process to costs.
1. What Is A Commercial Appraisal?
An Appraisal Report, according to the Uniform Standards of Professional Appraisal Practice (USPAP https://uspap.org), is “any communication, written or oral, of an appraisal or appraisal review that is transmitted to the client or a party authorized by the client upon completion of an assignment.”
Many people think of an appraisal report as a document written by an “appraiser,” which provides the value of a property. The truth is an appraisal report is only one possible product of the entire appraisal process.
An appraisal report is most often found in the form of a document that summarizes or states the steps taken and information considered in the development of an opinion of value. A Commercial Appraisal Report can take many forms but is most often a narrative, typewritten appraisal report.
2. Who Hires A Commercial Appraiser?
Depending on the intended use and intended user(s) of an appraisal report, an appraiser may be hired, or “engaged” by your lender, lawyer, accountant, or yourself.
For example, if you are applying for a loan to purchase a commercial property, your lender will engage an appraisal firm with whom they have developed trust and confidence.
You may reach out to a commercial appraiser if you are simply seeking to understand the market value of your property, or the likely impact on the value of renovations, expansion, outside influences, etc.
Regardless of who engages the appraiser, it is important to engage a reputable commercial appraiser or firm, so that you will have a high likelihood of accuracy and credibility in the final report.
3. How Do You Find A Good Commercial Appraiser?
Every state has a licensing process for professional appraisers, which is tiered, based on the appraisers’ level of education, experience, and knowledge of the appraisal process.
Certified Commercial Real Estate Appraisers
The highest certification in most states is the Certified General Real Estate Appraiser. Certified General appraisers must have a minimum amount of classroom hours, a minimum amount of actual appraisal experience working on real projects of various property types, and must attend continuing education on a periodic basis. For example, in Illinois, a Certified General Real Estate Appraiser is required to have a minimum of 300 hours of classroom hours and 3,000 hours of appraisal experience.
A good start in seeking a qualified commercial appraiser is to verify that they are a Certified General Real Estate Appraiser in the state in which the property to be appraised is located.
Commercial Appraiser Qualifications & Experience
Next, a good commercial real estate appraiser should be familiar with the market area surrounding the subject property and have a good understanding of current market trends and factors that may affect the value of your property.
A brief consultation with a prospective appraiser can give you confidence that they are competent to appraise such a property in your neighborhood. Ask for references, an overview of the appraiser’s experience with your property type, and what other projects they have recently completed in the area. Check the appraiser’s website for information related to qualifications, education and experience with various property types and locales.
The Appraisal Institute
Lastly, there are several private organizations that provide designations to member appraisers if they prove a level of competency and depth of knowledge related to the commercial appraisal industry.
Perhaps the most widely known is the Appraisal Institute. The Appraisal Institute (AI) provides educational opportunities for an appraiser to meet their minimum education requirements for state certifications, continuing education classes, and a program of accreditation in which those who meet education, experience, and testing requirements can become a Designated Member of the Appraisal Institute or MAI.
An MAI designation is an assurance to anyone considering the engagement of an appraiser that the appraiser has a level of experience and education that surpasses most state requirements. This ensures a level of quality and credibility respected by all sectors of the appraisal industry.
Engaging an MAI-designated commercial appraiser gives you peace of mind knowing your appraiser exhibits a high level of understanding and application of appraisal principles, along with integrity, impartiality, and credibility.
4. The Commercial Appraisal Process
Once an Engagement Letter is signed, a commercial appraiser will begin the appraisal process.
Appraisal Pre-Inspection Questions & Documentation
You will be contacted by the selected appraiser who will ask questions related to the subject property such as:
- How long you have owned the property,
- What did you pay for the property
- If you have completed any significant renovations or rehabilitation
- Is the property currently leased
- …and any other questions that may help determine your property’s value
These questions are designed to help the appraiser develop the scope of work necessary to complete the commercial appraisal process.
The appraiser may ask you to provide some documents at this time, such as any pending purchase agreement or lease, historical income and expense information, invoices for work completed on the property, plans and cost estimates of any planned work, etc.
Commercial Appraisal Inspection
Depending on the scope of work, the appraiser might need to visit the property for an inspection. The inspection is a rather simple process in which the appraiser tours the exterior and interior of the property, taking notes and photographs to understand the quality, condition, and utility of the property.
The commercial appraiser may have questions both during the inspection process and after reviewing the inspection photos and notes. It is important to be truthful and transparent when responding to appraiser requests.
As an experienced professional, the commercial real estate appraiser will know just how to present the information provided in order to have the most meaningful impact on the valuation. The goal of the inspection is to understand how the subject property fits into the market area, who a most probable buyer might be and whether the property is in keeping with the character of the neighborhood, and how it is similar and different from other properties in close proximity.
Analysis of Market Conditions, Trends, & Geo-Economic Data
Once the scope of work is developed, the commercial appraisal process can begin in earnest.
The commercial real estate appraiser will investigate and examine current market conditions and trends, review economic and demographic data relative to the subject’s neighborhood, the impact of external factors potentially affecting the subject property (such as nearby new construction that may compete with the subject) and other factors that can impact the marketability and value of the subject property.
The commercial appraiser will examine comparable rental properties to determine a likely income potential for the subject, which is of interest to investors, as well as examining recent nearby sales of similar properties to gain an understanding of the expectations of various market participants.
After all the necessary data has been gathered and the appraiser has a complete picture of the subject, they will begin to analyze the property from the perspective of the most probable future buyer. Market data is selected for inclusion in the analysis based on its appropriateness and the analysis is then conducted employing appraiser judgment and experience.
Lastly, the resultant value estimates are reconciled to derive the final concluded market value of the commercial property.
5. When Do I See The Commercial Appraisal Report?
If you engaged the appraiser directly, the commercial appraisal report will be delivered to you based upon your predetermined method.
If the commercial appraiser was engaged by a lender, for example, then the appraisal report will be delivered directly to the lender. It is important to note that regardless of who actually pays the appraisal fee, the Client is the party who directly engages the appraiser.
If you did not directly engage the appraiser, you may have to ask the Client to provide you with a copy. Appraisers are not allowed to discuss the contents of an appraisal report, including the value conclusions, with anyone not specifically identified by the Client. This may seem inconvenient, but it is the best way to ensure that the commercial appraisal report is only seen by the intended user(s) and utilized for its intended purpose.
Once the commercial appraisal report is delivered to the Client, it will undergo a review process in which the report is checked for completeness, compliance with applicable laws and standards, accuracy, and credibility. If there are any questions or concerns, the commercial appraiser will work directly with the Client to resolve any issues and even deliver a revised appraisal report, if necessary.
6. How Much Does A Commercial Appraisal Cost?
As you can imagine, every commercial property is different, and therefore every commercial appraisal is going to be different as well.
The Scope of Work of any assignment will be partially dictated by the Intended Use of the appraisal, the Client’s specific requirements, government requirements and regulations, the size, use, and location of the subject property, and other factors.
Some appraisal firms will offer set pricing and others will provide a quote including the fee for the appraisal and the delivery date expectations. The price can be affected by many factors, so it’s best to reach out to a qualified appraisal firm and inquire.
Conclusion
Commercial appraisals are an essential process for any property owner looking to buy, sell, or determine the value of their property.
There are different types of commercial appraisals and methodologies to valuations, so it’s always recommended to partner with an experienced team of commercial valuation experts that understands your financial goals and needs.
If you’d like to reach out to us, we’ll be very happy to answer all of your questions and provide you with a quote. We look forward to hearing from you soon!
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