Commercial real estate appraisal can be quite complicated with many potential factors to consider. Check out this article for a breakdown of the process
The market size of the commercial real estate industry in the US has grown dramatically over the past years to reach $9 billion as per 2018. The figure is expected to increase at a rate of 2% in 2019. Commercial real estate is properties used exclusively for business purposes.
They include any building or land owned to produce income such as industrial buildings, shopping centers, malls, apartments, office buildings, and hotels. As a property owner looking to sell your property, you will need to carry out a commercial real estate appraisal.
What is A Commercial Real Estate Appraisal?
A commercial real estate appraisal is the process in which the worth of property (market value) is determined. The commercial real estate appraisals form a foundation for sales, taxation, loans, etc.
A commercial real estate appraisal gets conducted by a licensed appraiser. They have been specially trained to inspect industrial buildings, lands other properties. This is to determine the market value before they can be sold or bought or even insured. The appraisers work at real estate firms, mortgage providers, banks, and government agencies.
Once the appraiser and the property owner/seller have agreed to conduct an appraisal, they sign an engagement letter. The appraiser begins his work through some of the following methods of determining the property value
The Cost Approach
This method involves estimating the value of a property by defining the price it would take to replace the property. This approach is based on the knowledge that market contributors associate cost with profit.
A commercial real estate appraiser will check the property and noting the type and quality of materials used; he will come up with the price it would take to replace the property using similar materials. When he finally comes up with a replacement cost amount, he will deduct the cost of depreciation based on the age and the condition of the property.
Comparative Sales Approach
The relative sales approach, also known as the market approach, involves the appraiser looking at the recent sale of similar properties around the area to determine the sale of the subject property.
The appraiser will take into account the features of the sold properties. This is to obtain the market value of the subject property by either adding or subtracting the value of the structures to the value of the subject property. This method is the most commonly preferred method by most commercial real estate appraisers.
The Income Approach
This type of approach used for most commonly used for commercial and rental properties. With this method, the appraiser will take into account the income the property is creating, as well as the possible returns it could produce.
From these earnings, the appraiser will subtract the expenses of maintaining the property. By subtracting the costs from the proceeds, the appraiser will determine an average annual net income for the property. The number is then multiplied by a factor of years, subject to the period of the return of the investment.
The process of commercial real estate appraisal depends on the size and density of the property that needs evaluation. It also depends on the need for the assessment. The process is not simple and usually take hours or even days to inspect the property.
Things Considered by the Appraiser
The appraiser considers a number of things during his work. Here is a look at them for a better understanding.
The real estate appraiser checks to see if the property is in a desirable; this will show that it’s a secure neighborhood.
Condition of the Property
The appraiser will check the inside of the property to see whether the property is in good condition. The appraiser will check for the quality and extent of renovations.
For a hotel, the appraiser will check to see if there is sufficient parking on site for visitors. After that inspection, the appraiser analyzes the facts as it relates to the value of the property. They draft a report that will feature building enhancements, history of sales and ownership, information on zoning, local and market area reports.
Find out more on commercial real estate if you are looking to hire a real estate appraiser.
The Importance of Conducting a Commercial Real Estate Appraisal
A property owner may need the services of a real estate appraisal for the following reason:
- For tax assessments
- Determining inheritance taxes
- To help sellers determine the selling price or help buyers identify the right buying price
- Assists in establishing a value of security for a loan
- Aid in the issuance of stock
- Assessing damages created over time or by weather conditions for example Tsunami
Things to Know About Commercial Real Estate
Some of the things you need to know about commercial appraisal are:
The Cost of Appraisal
The cost of the appraisal ranges between $2,000 to +$5,000. The commercial appraisal fees differ mainly by the difficulty of the investigation, how easily available the data is, and the magnitude of work.
Appraisers Follow a Strict Code of Ethics
Commercial real estate appraisers follow a strict code of ethics which govern their practice. Follow to abide by the code results in disciplinary action and revocation of the appraiser’s credentials.
Get Your Property Appraised Today
Commercial real estate appraisal is a procedure conducted by a real estate appraiser to establish the market value of a property for either sale, mortgage, or even insurance. Commercial real estate is properties that bring revenue, such as an industrial building, hotels, etc.
The appraiser uses three methods to determine property value. These methods are cost approach, the income approach, and the comparative sales approach. The appraiser investigates the property by looking at the location, condition of the building, etc. then finally writes a report of the findings. Read on to learn more about other real estate and investment insights.