6 Significant Things About Commercial Real Estate Appraisals
Business owners often need a commercial real estate appraisal for a variety of reasons, such as real estate sales and purchases, financing, property insurance, investment and marketing & listing purposes.
But what is a commercial real estate appraisal? Also known as a property valuation, a commercial real estate appraisal is simply the process of estimating the value – usually the market value – of a property for a specific purpose. The property may be a strata office unit, strata retail unit, strata warehouse unit, office building, industrial building, development land or a multi-unit apartment building.
Real estate appraisals can be critical to important business decisions. Consequently, it is crucial to know the process.
How long does it take?
The commercial real estate appraisal process is lengthier than the residential process by a few weeks because of its complexity and highly subjective nature based on several factors.
Here are six significant things you should know about commercial real estate appraisals:
1. The inspection is only the beginning
An appraiser typically visits the property being valued to conduct an inspection. The inspection can last as little as an hour or as long as several hours, depending on the size and complexity of the property. However, this is by no means the sum of the appraisal process. The inspection is only the beginning. Data on inputs such as public ownership, zoning records, demographics of the neighbourhood, replacement costs, rentals and comparable sales that impact the valuation also need to be compiled and analyzed. The findings are presented in an appraisal report, which can be as huge as 100 pages.
2. Do not misrepresent the facts
The appraiser is duty-bound to present as accurately as possible a valuation for your property, as he just might have to defend his or her position in court. Regardless of the information you present, he or she will do the requisite due diligence to verify that information. Be honest with your appraiser. You risk your credibility should you misrepresent any facts.
3. Be forthcoming with information
There are several documents that the appraiser will likely request to complete their appraisal, including income tax statements, blueprints and property tax bills. Though you may deem such documents private, you should comply with the appraiser’s requests. The appraiser is bound by client confidentiality and is not at liberty to divulge the contents of the report without your expressed permission. Being forthcoming will allow the appraisal process to move more quickly and smoothly.
4. The appraisal report is confidential
Appraisers are mandated to maintain client confidentiality. Unless you indicate otherwise, the appraiser is not at liberty to share the contents of your report with anyone besides the intended user. So, for example, an appraisal requested by a lending institution to facilitate your purchase of a piece of property is solely for the eyes of the lending institution. Therefore, you would not be privy to it. If there are specific individuals with whom you wish to share the contents of your appraisal report, you should indicate this to the appraiser so that he or she can add those individuals to the report.
5. Establishing a date for the valuation
Property can either be appraised as at the date of inspection, as at a past date (a retrospective appraisal) or as at a future date (a prospective appraisal). Consult with your appraiser to determine the date that best suits your needs.
6. Approaches to calculating the value
Commercial appraisals rely on one or more of the following three approaches to value a property:
- Direct comparison approach: The appraiser analyzes sales data on recently sold comparable properties in the same market area, to estimate the property’s market value. Values are added for similarities and deducted for differences. The challenge with this approach is that no two commercial properties are exactly alike, making it sometimes difficult to find comps.
- Cost approach: This approach estimates the market value of the land and adds the depreciated value of the improvements. This approach is good for very unique, one-of-a-kind properties, like the Taj Mahal or the White House. It is also a good supplementary approach to support either the income approach or direct comparison approach
- Income approach: The income approach is typically used to appraise income-generating properties like apartment buildings and hotels. It takes into account the future income-generating capacity of the property being appraised. The value is calculated by dividing the net operating income by the capitalization rate or rate of return expected on the property being appraised.
Your connection to an experienced real estate appraiser
If you require a real estate appraiser, Adlaw Appraisals can help you. Our experienced and knowledgeable appraisers are eager to help you secure accurate property valuations with a speedy turnaround. Contact us today for a consultation!