How do Commercial Property Appraisals Work?
In the realm of commercial real estate, knowing a property’s worth is essential to making wise investment decisions. A commercial property appraisal is crucial in this situation, offering an evaluation of a property’s fair market value by considering several variables that affect its worth. Whether you are buying or selling, a commercial property appraisal provides an unbiased assessment of the property’s value.
In this blog post, we will highlight the importance of commercial property appraisals in the real estate sector.
What Is a Commercial Property Appraisal?
A commercial real estate appraisal involves a comprehensive evaluation of the worth of a commercial property. This assessment is conducted by a licensed commercial property appraiser (AACI) and results in a report that provides an estimate of the property’s market value. Commercial properties include office and apartment buildings, retail stores, restaurants, shopping centers, vacant lots, and development sites.
When purchasing, selling, or financing commercial real estate, knowing the value of the underlying asset is critical. This requires an impartial assessment of the commercial property’s current market worth by an unbiased third-party assessor. All parties engaged in a real estate transaction would be well-served by hiring a competent appraiser to complete a commercial appraisal.
Why are Commercial Property Appraisals Important?
Accurate commercial property appraisals are essential for lenders and investors as they establish the property’s value and potential returns on investment. Incorrect evaluations can lead to losses if investors fail to achieve expected profits due to overvaluation or undervaluation of the property. Therefore, appraisals are crucial to ensure fair pricing and informed investment decisions.
Appraisers play a vital role in evaluating commercial real estate by providing fair and objective assessments of properties. They utilize various approaches—including the income approach, cost approach, and sales comparison approach—to estimate a property’s value, taking into account its unique characteristics such as location, size, quality, age, and future growth potential. At Urban Team, we offer customized real estate appraisal services to meet all your valuation needs. Schedule your consultation now!
You may also like:
What are the Top Benefits of Leasing Retail Space in Surrey
How Can Commercial Property Insurance Help Your Business?
The Commercial Property Appraiser’s Role and Responsibilities
Appraiser’s first task is to identify the appraisal problem that has to be resolved. This includes knowing the purpose of the appraisal, i.e. What is the purpose of the appraisal order? Who is placing the appraisal order? What is going to be done with it? Who is going to read the appraisal and decide what to do based on it?
Appraiser uses the answers to these questions to gauge their level of expertise with the appraisal problem, the amount of research and analysis needed, and the amount of information to include in the client report.
It is the appraiser’s responsibility to deliver services that meet the needs of the assessment and avoid making an inaccurate report. For instance, a client with little financial information asks for a “drive-by” appraisal on a complicated income property. This is typically only possible with explicit and noticeable statements alerting the client to the appraisal’s limits and related dangers. Most appraisers would turn down such an assignment unless there were exceptional circumstances.
It is the appraiser’s responsibility to provide the level of expertise, investigation, diligence, and analysis appropriate to the extent of the appraisal. Most appraisers conduct market value assessments within their market area. This is primarily because knowledge of the market is a necessary component of competency, and mastery of a particular property type in one market does not imply expertise in another.
A commercial appraiser hired for an assignment has a fiduciary duty to uphold confidentiality. Any information about the property that was revealed by the client during the appraisal is regarded as confidential. Only the appraisal results and report with the customer may be shared by the appraiser after being authorized by the client.
How Does the Commercial Property Appraisal Process Work?
Inspection and Data Collection
Inspection is among the first activity carried out by an appraiser shortly after the subjects are removed by both the seller and the buyer in a sale transaction. As part of the financing due diligence, the lender instructs the buyer to order an appraisal from an AACI designated appraiser. After being retained for the appraisal, the appraiser will schedule a time to do carry out site inspection.
The appraiser will evaluate the property physically, including the existing improvements, location, access, quality of improvements, size, defects, defferred maintenance and any additional development potential. In addition, the appraiser inspects the neighborhood around the property as factors such as neighbourhood quality, proximity to manufacturing activites may also have a negative impact on value.
Market Research
The second step in the process involves a comprehensive market research related to the property type being appraised. The appraiser examines the market supply demand characteristics of the property type being appraised. This also inlcudes the vacancy rates, markets sale and lease prices, market absorption rates, cap rates etc. The aim of the market research is to identify general commercial real estate trends in the market and how they would impact the value of the subject property.
Approaches to Value
The next steps in the process involve an impartial evaluation of a subject property’s market value, using “The Three Approaches To Value” or a combination of most appropriate approaches to value. A summary of these approaches to value is provided below:
- Income Approach: This approach is applied to income-producing properties, such as shopping malls and office complexes. Rental rates are analyzed from comparable income producing properties to confirm the rental rates for the subject. Any applicable property owner expenses are deducted from the projected gross revenue to arrive at a net operating income. This is capitalized at an appropriate rate determined through an analysis of sales.
- Sales Comparison Approach: This approach uses the principle of substitution, which states that a prudent purchaser will not pay more for a property than it would cost to buy an equally desirable substitute property. It involves gathering, analyzing and comparison of data on comparable properties that have sold, for which offers have been made or that are offered for sale,
- Cost Approach: This approach is based on the assumption that the cost of a property should be equal to the cost of building an equivalent property from scratch. In the cost approach, the property’s value is equal to the cost of land, plus total costs of construction, less depreciation.
Adjustments
An appraiser adjusts for property’s location, age, size, amenities, quality, condition and negative externalities when determining an appraiser’s value of a property. These modifications are typically intricate and necessitate a thorough comprehension of both the particulars of the property being assessed and the local real estate market.
Frequently Asked Questions (FAQs)
Q: What elements affect the valuation of commercial property appraisal real estate?
The value of a property is influenced by various factors, such as:
- Location and the neighborhood
- Type of property: office, retail, or industrial
- Dimensions and arrangement of the structure Age and state of the land
- Facilities and attributes
- Conditions of lease and possible revenue
- Supply and demand in the market
- Contact us at — for expert property valuation services
Q: Why Do I Need an Appraisal?
- Appraisals provide an unbiased opinion of value.
- Lenders require them for financing.
- Investors use them for due diligence.
Q: What Factors Affect Property Value?
- Location, condition, and size.
- Rental income and expenses.
- Market trends and demand.
Q: How long does a commercial building appraisal take?
The timeframe for an appraisal can vary depending on the complexity of the property and the availability of data. It typically takes 1-2 weeks for a standard appraisal.
Takeaway
Navigating the complexities of commercial property appraisal can be daunting, but with expert guidance and market analysis, you can gain valuable insights to make informed decisions and achieve your business goals.
At Urban Team, our goal is to provide the professional appraisal services you need to succeed in commercial real estate. Contact us today to discuss your requirements and learn how our commercial appraisals can benefit your next investment. Schedule your consultation now!
