What Happens during the Commercial Appraisal Process
At National Appraisal Partners, we gather the property and assignment details for your commercial appraisal request and provide you with a free, no-obligation quote of the cost of the appraisal. Once you have selected us for the assignment and we are fully engaged, our appraisal process begins.
The commercial real estate appraisal process is a systematic approach used to determine the value of a commercial property. A commercial property appraisal is essential for various reasons, including financing, estates, sales, taxation, and insurance purposes.
Here’s an overview of the steps in the commercial appraisal process and what it typically provides:
1. Define the Purpose of Commercial Real Estate Appraisal
Establishing the purpose of the commercial real estate appraisal is the first critical step in the appraisal process. This involves identifying the reason for the appraisal, which could be for a variety of purposes such as sale, purchase, refinancing, tax protest, estate planning, or insurance purposes. Understanding the specific purpose of the appraisal helps guide the appraiser in selecting the most appropriate methods and approaches for determining the property’s value.
The property owner plays a crucial role in this step by providing essential information and documentation necessary for the appraisal. This includes items such as property surveys, tax records, lease agreements, and any other relevant documents that can impact the appraisal. A clear understanding of the appraisal’s purpose ensures that the final appraisal report meets the needs of all parties involved, including lenders, investors, and regulatory bodies.
Additionally, defining the purpose helps in setting expectations and objectives for the appraisal process, ensuring that the appraiser can deliver an accurate and unbiased opinion of the property’s market value.
2. Engagement and Agreement
The appraiser and client agree on the scope of work, fees, and the timeline for the appraisal. This is documented in an engagement letter.
Hiring a qualified commercial real estate appraiser is crucial for an accurate assessment of market value, as they understand local market conditions and play a critical role in various real estate transactions like buying, selling, and securing loans.
3. Gather Data
The appraiser collects relevant data, which includes various types of commercial properties such as vacant land, office buildings, retail, industrial facilities, special purpose facilities and multifamily housing.
The data collection process is comprehensive and involves several key components:
• Physical Data: This includes detailed information about the property’s size, location, architectural design, structural condition, and any improvements or renovations that have been made. The appraiser also considers the age of the building, zoning regulations, and any other factors that could impact the property’s value.
• Market Data: We conduct an in-depth analysis of the local and national real estate markets by researching many comparable databases, including our own proprietary database. This involves examining recent sales and leases of similar properties in the area to understand market trends, supply and demand dynamics, and economic conditions that could influence property values.
• Financial Data: When applicable, we meticulously review historical income and expense reports, rent rolls, leases and financial statements to assess the property’s financial performance. This includes analyzing operating expenses, maintenance costs, and capital expenditures to determine the property’s net operating income. We also compare this data with similar properties to evaluate the property’s financial competitiveness.
By gathering and analyzing this comprehensive data, the appraiser can form a well-rounded understanding of the property’s value within the context of the current market, ensuring an accurate and reliable appraisal.
4. Inspect the Property
During the inspection phase of the commercial appraisal process, the appraiser conducts a thorough on-site evaluation of the property. This step is crucial as it allows the appraiser to gain firsthand knowledge of the property’s physical condition, layout, and unique features that may impact its market value. The appraiser will measure the buildings to verify their dimensions, assess the structural integrity, and note any improvements or renovations.
In addition to evaluating the physical aspects, the appraiser considers the property’s location, accessibility, and surrounding infrastructure. They also take into account factors, such as flood zones, that could influence the property’s value. This comprehensive site visit ensures that the appraiser has a detailed understanding of the subject property, allowing for a more accurate and reliable valuation.
The appraiser also takes photographs and gathers additional documentation during the site visit to support their findings. This step is essential for providing a complete and detailed appraisal that reflects the property’s true market value. By utilizing specific methods and approaches, such as the Income and Cost Approaches, the appraiser can effectively determine the property’s value based on the information gathered during the inspection.
5. Interview Market Participants
Many appraisers do not regularly “talk to the market.” At our firm this is a very important part of the appraisal process. This includes local and regional brokers, developers, and investors.
Commercial appraisals are crucial in evaluating various property types, including office, retail, industrial facilities, apartments, and multi-family units.
6. Analyze the Data
We subscribe to numerous comparable databases locally and nationally (including our proprietary one). Researching, confirming, and using the best comparable data is key to this process.
The appraiser analyzes the data using one or more of the following approaches to market value:
• Sales Comparison Approach: Compares the property to similar properties that have recently sold in the area.
• Income Capitalization Approach: Evaluates the property based on its ability to generate income. This approach helps determine fair market value by analyzing current and projected income.
• Cost Approach: Estimates value based on the cost of replacing the property, minus depreciation, plus land value.
7. Reconcile the Values of Comparable Properties
Reconciliation is a critical step in the commercial appraisal process, where the appraiser synthesizes the values derived from each applicable approach—Sales Comparison, Income, and Cost—to arrive at a final, credible value estimate. This step involves a detailed analysis of the strengths and weaknesses of each method, taking into account the quality and reliability of the data collected, the relevance of each approach to the specific property type, and current market conditions.
The appraiser weighs the results from each approach based on their applicability and reliability. For instance, the Sales Comparison Approach might be given more weight in a market with abundant comparable sales, while the Income Approach could be more relevant for income-generating properties like office buildings or retail centers. The Cost Approach may be prioritized for properties with unique features or new construction.
By reconciling these values, the appraiser ensures that the final value conclusion is well-supported and reflects a balanced consideration of all relevant factors. This reconciliation process is guided by professional appraisal practice standards, ensuring that the appraisal report is both accurate and defensible.
Ultimately, the reconciliation step ensures that the appraised value provides a fair market representation of the property’s worth, supporting informed decision-making for property owners, investors, and lenders involved in commercial real estate transactions.
8. Report the Findings in the Appraisal Report
The appraiser prepares a detailed technical and professional appraisal report that includes:
• A description of the property and its surroundings.
• An explanation of the appraisal methods and the reasoning behind the value conclusion.
• Supporting data and documentation.
• The appraiser’s final opinion of value.
9. Appraisal Methods
Commercial real estate appraisals involve various methods to determine the value of a property. The three approaches used in commercial property appraisals are the Sales Comparison Approach, the Income Approach, and the Cost Approach.
a. The Sales Comparison Approach
The Sales Comparison Approach is a method used to determine the value of a commercial property by comparing it to similar properties that have recently sold in the same market. This approach follows the principle of substitution, which asserts that a buyer will not pay more for a property than the cost of acquiring a comparable one. Commercial appraisers use this approach to analyze the sales data of comparable properties, making adjustments for differences in features, location, and other factors that may affect the value of the subject property.
b. The Income Approach
The Income Approach is a method used to determine the value of a commercial property based on its potential to generate income. This approach is commonly used for income-producing properties such as office buildings, medical facilities, apartments, and retail centers. Commercial appraisers use this approach to estimate the net operating income (NOI) of the property, which is then capitalized to determine the value of the property. The Income Approach takes into account factors such as rental income, expenses, and market conditions to determine the value of the property.
c. The Cost Approach
The Cost Approach is a method used to determine the value of a commercial property by estimating the cost to replace or reproduce the property. This approach is based on the principle that a buyer will not pay more for a property than it would cost to build a new one with similar features and functionality. Commercial appraisers use this approach to estimate the land value, costs of construction, and other expenses associated with building a new property. The Cost Approach is often used for properties that are unique or have specialized features, such as hospitals or hotels.
In conclusion, commercial real estate appraisals involve a few or all three approaches to determining a property’s value. A licensed commercial real estate appraiser will use one or more of these approaches to provide an accurate and unbiased opinion of value.
Our Team at Work For You
Our most valuable asset is our team of dedicated professionals. During the course of each project, we work closely with our clients and their representatives to accomplish the stated goals of the valuation in a timely manner. Regardless of your transaction or scenario, National Appraisal Partners LLP have the people, skills, resources, and geographic reach to help you achieve your real estate business objectives.