The Basics of Commercial Real Estate AppraisalBanker Resource
May 8, 2013 — 1,675 views
There are many reasons why one should go for a commercial appraisal. These include facilitating mortgage and real estate transactions, lowering the tax burden, establishing the replacement value of insurance, protecting your rights in a case of condemnation, and so on. The appraiser or the person who performs that appraisal gives an unbiased professional opinion about the market value, which can be used in making real estate related decisions.
To conduct a formal appraisal on a commercial property, there are three basic methods that are followed. These methods are described below.
The Cost Approach
The cost approach to an appraisal determines the amount that it will require to make improvements on a commercial property and carry out constructions. It also includes the value of the land in question. This method is based on the assumption that the final value is exactly the same as the cost that is required to construct the property or make improvements to it. To make an appraisal based on this method, one will require an in-depth knowledge of the construction process and the cost of materials involved in it.
The Sales Comparison Approach
The sales comparison approach is based on the comparison of the concerned property with similar properties in the market which have been recently sold. Once such properties are identified, they will be compared with the property which has been chosen for appraisal. The appraiser will then deduct the value of the property based on comparative differences and will increase the value based on its advantages. This is the best method to be followed in case you want to perform a commercial appraisal. This method of appraisal is made use of in case the investor of the property is looking for conventional financing.
The Income Capitalization Approach
This approach gains importance when appraisals of properties that produce income are being carried out. Here, estimation is made on the amount that the investor will pay on the property. If the investor has an idea about the prevailing capitalization rates in a market for a particular type of property, then he/she can come up with a sales value for the property by dividing the income generated from the property by the capitalization rate.
The Appraisal Report
By following one of the above methods, an appraiser will be able to prepare a formal appraisal report. The report will have details regarding the client and the other users who are involved in the dealings, the purpose of making the report, and the purpose of carrying out the assignment. The report should also identify the type of value reported, the effective date of the report, and the scope of the work that is made use of to complete the assignment.
While making the report, the appraisers must adhere to their code of ethics. One should ensure that the analysis of information used in the preparation of the appraisal report was appropriate. At the same time, the client who asked for the commercial appraisal should not withhold any information or should not try to misinterpret facts, for the appraisal to be accurate.