Whether you are buying or selling commercial real estate, you will need to know about commercial real estate appraisals and how they are important in business. An appraisal is a third-party opinion that helps determine the property’s value.
Commercial real estate appraisals work a little differently because they do not determine the value of a single-family home or condo. Rather, they assess the value of office buildings, hotels, housing complexes, or retail spaces.
You will always need an appraisal for properties that are being taxed, mortgaged, sold, insured, or developed. Since you need a legally binding document, you must ensure that all appraisals are done by a licensed appraiser. Make sure to check the credentials for people before agreeing to work with them.
A commercial real estate appraisal will provide all the necessary information for managing, selling, investing, lending, and owning property.
[ Rental property investor, rehabber or wholesaler? Get to know which investing strategy is the best fit for YOU by attending our FREE online real estate class. ]
What Is A Commercial Real Estate Appraisal?
A commercial real estate appraisal needs to be done by someone with experience valuing commercial buildings. This is because commercial real estate buildings are appraised differently than residential ones. Commercial appraisals are often more complex because they determine how much income a property can bring in. An appraiser also needs to know how to examine different aspects of the buildings and the property to help determine the value.
Keep in mind that an appraisal is different from an inspection. Appraisers only focus on the values of the property while building inspectors search for physical signs of damage, including the presence of termites or mild.
Usually, you will have an inspection done before an appraisal. The commercial real estate appraiser will also use the inspection papers to help them determine the value. For example, the value of a building will go down if mold is present since whoever is buying the building will need to pay for additional work to be done to get rid of the mold.
What Are Commercial Real Estate Appraisals Used For?
As stated above, commercial real estate appraisals are mainly used for determining the value of a building or property. Several people will need to see and use the appraisal during the buying process and transaction.
Here are some of the main ways that a commercial real estate appraisal is used:
By governments when they want to acquire property for public use.
For property tax assessment, when an owner feels like their property has been over-assessed and wants to appeal the decision. They will then use an appraisal to challenge the original assessment and try to get their property taxes lowered.
For various legal situations, including eminent domain work, divorce proceedings, or partnership dissolutions.
By lenders when they want to establish a level of security for mortgages or when they want to ensure their loan-to-value ratios are reasonable.
By property owners when they are planning to sell in the future and they want to make sure they get acceptable selling prices.
By prospective buyers who want to make they are not overpaying before signing a purchase agreement.
By commercial mortgage brokers who want to connect prospective buyers to the right lender for their commercial property.
How Long Do Commercial Real Estate Appraisals Take?
You can expect a commercial real estate appraisal to take longer than a residential appraisal, and this is because they are more complex and require more work. The timeline will vary depending on where you live, as some cities have more commercial real estate appraisals than others.
You will also need to wait for an inspection to take place, which can take time if there are no inspectors available. All in all, a commercial real estate appraisal will usually take about two to four weeks to complete.
It might take longer if your appraiser has many other assignments that they are trying to do at the same time.
How Much Is A Commercial Real Estate Appraisal?
The price for a commercial real estate appraisal will depend on the type of property and the size. They usually cost between $2,500 and $3,500. If the property is very large or complex, you might end up paying more. You can expect a hotel appraisal to cost more than an apartment building appraisal.
The number of units in the building will also affect the price. An apartment building with 15 units will cost less than a building with 100 units. Strip malls or properties with more than one tenant are also more complicated.
You will need to pay a higher fee for an appraiser to come look at these types of buildings because it will take them a long time to look at the property and the inspection reports.
Where Can You Find A Commercial Real Estate Appraiser?
Since you need to make sure you are using a licensed professional commercial real estate appraiser, you need to find one from The Appraisal Institute. People from this institute are highly trained, have all the correct credentials for appraisals, and give you the paperwork you need for legal decisions.
They are also knowledgeable about all properties, so you don’t need to worry about someone showing up who has never seen a property like yours before. While every state requires that an appraisal have state licensing, the requirements from The Appraisal Institute are more rigorous and thorough. If you only use someone with state licensing, you will have someone with fewer qualifications and less expertise.
3 Strategies For Commercial Real Estate Appraisals
When an appraiser is inspecting a commercial property, they will use three strategies to see the quality and condition of the building and the property. They might use all of the strategies or just one. All licensed commercial real estate appraisers will use one of the following methods.
1. Sales Comparison
Some people say this is the most straightforward type of valuation. The appraiser will look at the sale prices of similar properties. They will look at a price per unit sale price for apartment buildings or a price per square foot for other types of commercial real estate buildings.
They will then compare the property to other types of properties that are similar, including the size, floor plan, condition, and location. They will decide if the building is better or worse in all these areas.
According to their findings, they will then adjust the price by making it higher or lower. However, this method can become complicated when there are no similar buildings in the area that have recently been sold, and this makes it hard to make a comparison. Sometimes the appraiser will need to look outside the current market or at other locations, making the appraisal value much less accurate.
2. Income Potential
This method relies on using the building’s income potential. An investor will often decide on whether or not to purchase a building based on the income they can expect to receive from the property over time.
When using this method, the appraiser will determine the income the property will be able to make and subtract the operating expenses to get a final value. To find the income the building might be able to bring in, the appraiser might check rent comparables and find the historical operating data.
Some people agree that this is the most accurate way to find the value of a property. It can be used for all commercial real estate, but you will find it mostly used with offices, shopping centers, and large apartment buildings since all these places have a strong earning potential.
3. Replacement Cost To Build A Property
This method is used less often, but it’s based on replacement costs to build a property. You will only find it used for newly constructed buildings or buildings that are unlike other places on the market.
This approach assumes that a buyer would have difficulty building a similar building from scratch since the building is so unique. The cost approach also factors in labor fees and materials that it would take to build a new place.
This approach is not used as often as the other two, and when it is used, it’s most accurate if the building is less than ten years old since the depreciation would not be too significant. You can always estimate depreciation, but it will never truly be accurate.
Commercial real estate appraisals are used to determine the condition and value of commercial buildings like apartment buildings, shopping centers, and large offices. The process is longer and more complicated than appraising residential buildings. It’s also more complicated. Using a licensed appraiser will ensure you get an accurate estimate.
Ready to start taking advantage of the current opportunities in the real estate market?
Whether you’re brand new to investing or have closed a few deals, our new online real estate class will cover everything you need to know to help you get started with real estate investing. Expert investor Than Merrill explains the best real estate strategies to help get you on the path towards a better financial future.
Register for our FREE 1-Day Real Estate Webinar and get started learning how to invest in today’s real estate market!