10 Things to Know about Commercial Real Estate Appraisal

These days, when it comes to the subject of commercial real estate, business owners and investors have a lot to absorb. This is multiplied greatly when it comes to obtaining an appraisal on a piece of commercial real estate, a process that can greatly differ from appraisals done for residential properties. According to expert mortgage lenders most of the value derived from a commercial building is based on the rental rates received, relative to the expenses that are paid out. The underlying asset is important, but not even close to the way that a residential property values assets.

According to Douglas McKnight, a veteran commercial real estate appraiser, there are 10 crucial facts you need to know about commercial real estate appraisals. Whether you want to buy or sell a commercial property or you just want to establish a value of a lease or lodge a property tax appeal, these facts will help you to know what to expect.

1.The Inspection Is Only a Small Part of the Appraisal Process

Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.

2. Don’t Try to Misrepresent the Facts

Appraisers are expert skeptics. They will request to verify anything that you tell them from other sources. They may even ask questions that they already know the answer to simply to test the credibility of the people showing him the property. Appraisers constantly think about how they will defend their opinions if they are brought to court, even in positions where litigation appears unlikely. If you misrepresent any facts, the appraiser will automatically discount your credibility.

3. Don’t Withhold Information

You may be asked to provide a property tax bill, a set of drawings of the property, income statements, and other items. You may not know why the appraiser is requesting certain items, but it is best to provide whatever you can. The more you provide, the faster they can complete the assignment. Afterwards, if you dispute the appraiser’s value opinions and produce additional information that wasn’t provided from the get go, you have lost valuable time.

4. Appraisers Must Adhere to a Strict Code of Ethics

Appraisers are obligated to follow the Uniform Standards of Professional Appraisal Practice, which requires them to furnish an unbiased opinion. Failure to abide by this may result in disciplinary action from the state, including revocation of an appraiser’s certification. So if an appraiser refuses to do something you ask, it is possibly because of the requirement to obey these ethics.

5. The Client Is the Party That Orders the Appraisal

If the purpose for the appraisal is for financing, the lender is the client, and therefore orders the appraisal. Appraisers have an obligation to maintain client confidentiality. So the appraiser cannot release the appraisal report or any other confidential information to you, when you are the borrower. If the purpose is to appeal property tax rates the appraiser won’t release the results to the property tax board without your permission. So if you are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraisal is confidential.

6. Identify the Intended Users

Ensure the appraiser knows who you want to use the report. If you are buying a property, that could mean you plan to share the appraisal with the seller, your lender and possibly your local property tax appeal board. These parties will be made known in the appraisal report and are the only ones who are authorized to use the report.

7.There Are Three Types of Reports

A “restricted use report” can only be used by the client and is the shortest and least costly type. Fees vary based on the size of the property and the scope of the appraisal, but a starting point may be $2000 to $2,500. A “summary report” summarizes the data and analysis and can be used by any intended user and can cost upwards of $3,000. A “self-contained report” contains all of the details of the data and analysis, but is rarely requested. The appraiser can guide you as to what type of report you will need.

8. The Type of Report Is Separate from the Scope of Work

The type of appraisal is not based on the amount of work involved in reaching conclusions. With a restricted use or summary appraisal, the appraiser will accumulate huge amounts of information that are maintained in a work file but not included in these types of reports. Consequently, the differences in fees between the three types of reports are less than the amount of information each of them contains. So the same amount of work is done for all types of reports, the difference is what is included..

9.Consider the Date of Valuation

Instituting the date of valuation is imperative. Appraisers can appraise property as of the date of inspection, as of a past date called a “retrospective appraisal”, or as of a future date called a “prospective appraisal”. It is important that you establish the correct date of valuation for your needs.

10. Consider the “Property Interest” Appraised

Property interest refers to what your interest in the property is. Let’s say you want to know what a warehouse property is worth free and clear because you will be moving your business into it; here you are interested in what’s called the “fee simple interest.” You simply want to know the value of the building and its property. Now, let’s say you want to know what a property is worth to a landlord when occupied by particular tenants, here you have a “leased fee interest.” Finally, let’s say you want to know what a lease is worth to a tenant, so here you have a “leasehold interest.” This is a common request when looking to buy businesses since the value of the lease is to that business needs to be known.

 

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