In part two of this series on common questions about commercial real estate appraisals, we explain the different types of appraisals qualified appraisers may use to determine an accurate value of the site and more. In part one, we looked at some basic aspects of these appraisals. Read on to demystify this process.
More Common Questions About Commercial Real Estate Appraisals
We wrap up this series on questions about commercial real estate appraisals with answers to many aspects of this process, which can be confusing. We hope this gives you confidence to order and to interpret your own commercial appraisal report.
What types of commercial appraisals determine property values?
Value of commercial real estate can be derived in one of three ways by a qualified appraiser: the cost approach, sales comparison/market approach, and income capitalization approach.
The Cost Approach usually involves taking the fair market value — including depreciation — of a commercial property and calculating the cost of building an exact replica. This method begs the question about finding a similar site and assuming the same construction costs. Because of these and other questionable assumptions, appraisers use this on new or unique real estate with few comps.
A Sales Comparison/Market Approach demands more respect in the commercial real estate industry because it considers the current market value. The appraiser assumes a buyer will spend only what similar properties drew. His analysis compares important features the properties have in common, such as location, size, condition, floor plan, and state of the surrounding neighborhood.
Income Capitalization Approach involves a reasonable expectation of how much profit a property will likely generates over a few years. This approach commonly gets employed if a property earns income, such as shopping centers, office buildings and large apartment buildings. Both investors and lenders closely examine this value to decide whether they can recoup their money.
What are the kinds of reports appraisers do?
If you know how you plan to use the appraisal report, tell your appraiser. Often, they will help guide you on which type of written commercial appraisal report you need them to research and write. The Uniform Standards of Professional Appraisal Practice allows appraisers to do self-contained, summary and restricted-use reports.
All the reports include important factors, such as a description of the land, estimated value, list of risks and even negative aspects, such as environmental contamination, that may impact the market value.
Self-contained reports uses all the information and analyses the appraiser gathered. Although rarely used, it provides specifics on a wide-range of property information with few references to information found outside the report.
Meanwhile, summary reports sum up all the data and analyses the appraiser uncovered. Generally, the most frequently requested report includes access to additional information and analyses in files left out of the report. Typically, anyone can use a summary report.
Finally, restricted-use reports only contain the appraisal’s conclusions. You must go to a separate file outside of the report to find all the supporting evidence. Of the three types of reports, restricted-use can only be seen by the client, are the shortest and cost the least amount.
If you don’t need a written report, an appraiser can relay a verbal opinion of the commercial real estate value based on his analysis, instead.
Expect to pay a minimum of $2,000 for a commercial property appraisal report. The average cost ranges around $4,000. Very large-scale commercial projects typically command between $10,000 and $25,000.
Who sees the final commercial appraisal report?
Strict professional standards require appraisers to maintain client confidentiality. The rules prohibit them from sharing the results with others unless they have your permission. Typically, the seller, the bank, and the local property tax appeal board share a copy.
What overlooked aspects to be aware of?
Various commercial property appraisal aspects get overlooked. For one, ensure the appraisal gets a date recorded that makes the most sense for you. It can be dated on the actual date of the inspection, a past date, which is referred to as a retrospective appraisal, or a future date, also called a prospective appraisal.
Additionally, review the appraisal thoroughly. Check to see that the appraiser scrutinized every important property characteristic. Speak up, if you find any factor that is not precise.
Appraisers work tirelessly to give you the true value of your property. Provide all the material you can to enable your appraiser to conduct a thorough and accurate job. Hand over information promptly and cooperate to ensuring a smooth process.
What else should be kept in mind?
Keep in mind many sources of possible inaccuracies exist when an appraiser does a commercial real estate appraisal. Limited information, unrecorded details, no walkthrough of comparable properties and other issues arise during the process. Because of this, an appraiser may offer several possible values, not just one figure.
Rely on Paramount Property Analysts to Offer Reliable and Accurate Commercial Appraisals!
If you have any other questions about commercial real estate appraisals, call one of our highly qualified appraisers at one of Paramount Property Analysts’ six offices in Texas. We hope this Q&A has been useful. Contact us for your commercial property appraisal or any other property services we can assist you with.