Real estate appraisals can be tricky and challenging most of the time. If you’re only going through it for the first time, there are things that you should learn. It’s not always the most important part of the buying and selling process, but as a property owner, you’d want to know how to increase your real estate value.
For business owners, appraising commercial property is different than appraising the value of a residential property. The duration is typically lengthier and is often more subjective. It’s required to give a better assessment of the perceived value of a commercial property.
There’s no need to be intimidated by this process, especially if you know enough and the important stuff. Put on your thinking cap and start planning for your property’s value assessment. Here are the essential things to learn about commercial real estate (CRE) appraisals.
What is CRE appraisal?
A CRE appraisal is the assessment of the perceived value of a commercial property. These types of properties include retail spaces, office buildings, or even a piece of vacant land. It’s also referred to as commercial real estate valuation, which has the same meaning and implication as CRE appraisal.
Aside from determining a commercial property’s selling price, a CRE appraisal is also crucial for underwriting. For lenders to know how much financing they can give to a buyer at a safe level, they need to see the property’s appraised value. Lenders won’t loan more than an asset’s worth unless it’s appraised value has been determined.
An appraisal is also useful for investment purposes. If you want to invest in a commercial property, you’ll want to know how much of it you can get back from its value. It can also give you ideas about what use the property will be to you and your objectives.
The appraisal process
CRE appraisals are performed by professional CRE appraisers. They can either belong or be affiliated with a company or an independent contractor. These pros have extensive knowledge of property valuation, math, and communication skills that they use to assess a CRE’s value.
As aforementioned, the process can be lengthier in duration, and here’s why. Appraisals are more than just an inspection of the property. Depending on the property’s specifics (i.e., size, amenities), the entire appraisal can take longer than a week to complete.
Other than the physical inspection of the property, there’s information that must be considered to assess a CRE value properly. Building costs, zoning records, and neighborhood demographics can influence the assessment. Appraisers also compare the property against other sales in history.
Types of commercial appraisals
There are three different methods of CRE appraisals, and they are as follows:
Cost approach - this method declares that a CRE’s value is equal to the cost of constructing its duplicate. This method is used more for brand new properties due to depreciation and other factors.
Market approach - this method compares the prices of similar properties in the same market area where the CRE is located in assessing its value. It’s also referred to as the sales comparison approach and is considered an accurate valuation method.
Income capitalization - this method assesses the appraised value of a CRE using the future income it will generate. High income related structures such as apartment buildings are commonly subjected to this approach.
Appraisers usually use the method that they feel is more suited to assess your CRE. Sometimes, they also use more than one way to do it, but the appraiser will only consider one result.
Your CRE’s appraised value is an essential number to have because it will impact other future business decisions. Hence, it’s only right that you understand how that value came to be. Now you know what to expect, you can be more involved with the whole process.