COMMERCIAL APPRAISAL: What it is & How it Works

Commercial Appraisal
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Real estate investors must acquire a commercial assessment of properties or obtain financing approval before purchasing any type of commercial real estate. If you’re selling a commercial facility, there’s a good chance you’ll need to go through a commercial real estate evaluation. You might be wondering how that process works in light of that. We have covered every piece of information you need to evaluate a commercial property. You’ll learn what a commercial real estate appraisal is, the cost, how it’s performed, the companies that offer these services, and what you can do to raise the value of your property.

Commercial Appraisal

Anyone who wants to invest in real estate must appraise the property before purchasing it. During a commercial real estate appraisal, a qualified appraiser from a third party determines the valuation of an income-producing property. This kind of appraisal can be used to determine the value of any type of commercial real estate, including office buildings, multi-family residences, and retail establishments. A commercial real estate appraisal offers an impartial evaluation of the property’s value. Using this procedure, the value of properties such as multifamily dwellings, office buildings, or retail spaces is determined.

Like with a mortgage for a residential property, lenders will require applicants to acquire an appraisal on a commercial real estate property before they are approved for a loan to buy the property. This is done to prevent the brokerage from lending a borrower more money than the property is worth. While residential real estate evaluations frequently consider comparable properties, the CRE appraisal process is a more thorough review that takes the future earning potential of the new real estate into account.

What Different Methods Exist for Appraising CRE?

To determine a property’s value, a business appraiser has a choice of four basic methods.

#1. Cost Approach

Although it isn’t used very often these days, the pricing technique can be helpful if a structure is exceedingly uncommon or brand new. The cost technique determines the value of a property by calculating the price of a total rebuild. This approach takes into account the costs of the land, materials, and labor to determine how much it would cost to construct the same structure in the current market.

Commercial real estate appraisers always determine a property’s value using the same formula when employing the cost approach. It goes as follows:

Land cost+ building cost- accumulated depreciation = property worth

#2. Income Approach

The income approach is without a doubt the method of commercial real estate appraisal that is most frequently used. Using well-known investment formulas like net operating income (NOI) and capitalization rate, the appraiser estimates the amount of money the property should be able to generate in the present market when using this method for commercial valuation (cap rate).

The computation formula for the income method is as follows:

Net Operating Income (NOI) / Capitalization Rate represents = property value.

This method of appraising real estate is generally thought to be the most accurate. Now that has been said, keep in mind two things. On the one hand, the net operating income for the property must be appropriately reflected in the pro forma. The valuation will be inaccurate likewise.

#3. A Sales Comparison Method

The sales comparison strategy is the method used in residential real estate the most commonly. This method determines the worth of the subject property by using comparables, or the sale prices of similar properties.

#4. The Multiplier for the Gross Rent Method

The final alternative is the gross rent multiplier approach. Once more, individual investors use this tactic more frequently than an evaluation practice run by professionals. Actually, it’s more of a hurried, impromptu method of business appraisal.

By using comparables, you can figure out the typical gross rent multiplier for the area where the subject property is located. You should also check the pro forma for the building to determine the average gross rental income for the property. Once you have those numbers, you can use the following formula to get the property’s value:

Property value= annual revenue x gross rent multiplier.

Why Is a Commercial Real Estate Appraisal Important?

A commercial property evaluation is a crucial step in the real estate buying process that also ensures that a brokerage isn’t lending a borrower more money than a commercial property is worth. Here are three reasons why a business real estate evaluation is important.

  1. Checks the value’s current market value: A commercial property’s evaluation will determine its current market value and let the buyer and the lender know what the fair asking price is.
  2. Confirms that a lender is accurately estimating value: Lenders use appraisals to make sure they are not lending more money than the property is worth. The property is fairly valued and given to the lender by a third party.
  3. Provides a sense of the prospective revenue from the property: During the CRE evaluation process, the commercial property’s earning potential is taken into account. A third-party evaluation can assist prospective investors in determining if a firm is worth its money.

What are the 2 Types of Appraisals?

The first is the trait technique, in which managers assess a worker’s unique characteristics in light of their position, such as their customer-friendly nature. The behavioral approach examines particular behaviors within a given profession. Comparative approaches contrast one worker with other workers.

What is a Commercial Appraisal Called?

An income-producing property’s worth is evaluated by a professional appraiser from a third party during a commercial real estate appraisal.

Commercial Appraisal Cost

On average, you’re looking at $4000, but the cost might vary substantially. Depending on the property, it’s not uncommon for an appraisal to run up to $10,000 and, in some cases, much higher. You shouldn’t try to spend less than $2000 unless you are confident.

This does, however, leave you with a sizable budgetary cushion. What would suggest that you’ll spend $3000 instead of $25,000? Choosing an appraiser with a more fair pricing structure is important, but it’s not the only factor to consider. Depending on the property’s characteristics, the report you need, and the justification for the evaluation, the cost of the assessment may change. In order to get a more accurate view of the situation, it is worthwhile to dig a little deeper.

Aspects That Impact Commercial Appraisal Cost

The following are some of the aspects that impact the cost of commercial appraisal;

#1. Fields of Work

The task’s scope is another factor that affects the business appraisal process. Every scope of work has a different set of investigation, analysis, and reporting needs that could affect the appraisal charge.

As an example, think of a large truck stop. In addition to offering certified scales and repair services, a truck stop may also sell gasoline and feature a convenience shop, one or more restaurants, showers, and other amenities. Some truck stops lease space to companies that provide supplementary services, like barbershops and clinics.

The process of evaluating a business can consider the markets for restaurants, gas stations, shops, and vehicle repair businesses in the case of the truck stop. A bigger or more complex scope will surely have an impact on the appraisal charge, as one might anticipate.

Other Factors Impacting Commercial Appraisal Cost

Other factors may affect how much a business assessment report costs. When assessing the costs of company appraisals, the following criteria are frequently taken into account:

  • Location of the concerned property: Properties in rural places or regions with little market activity may need a lot of work to gather relevant market data, especially if the appraiser needs to buy data from a reliable third party.
  • If a visit to the pertinent property is necessary: It is important to factor in the cost of travel when pricing properties that are located far distant or outside of the state.
  • If more detailed information is needed: The appraiser could be asked to gather specific market information related to the subject property for different commercial structures, like hotels, for instance. Reputable businesses like STR, Inc. (Smith Travel Research) offer a range of specialist market studies, including market data that is helpful to appraisers, for a fee.
  • Obtaining a report on a single or more commercial appraisals: If many commercial evaluations are ordered at once and the necessary research and analysis are the same for all of them, there might be saved.

How do You Determine the Value of a Commercial Property?

The most popular strategy for valuing commercial assets is to base the value on recent comparable sales transactions.

What are the Three Methods of Appraisal?

The Comparison Approach, the Income Approach, and the Cost Approach are the three primary methods of appraisal that have historically been acknowledged by appraisal practice.

What are the 7 Steps of The Appraisal Process?

How to Evaluate Employee Performance: 7 Steps

  • Collect data on your development and performance.
  • List your accomplishments when you are finished.
  • Finish the Self-Evaluation.
  • Establish a development plan.
  • Draft objectives for the upcoming season.
  • Inform your manager of your plans.
  • Become open-minded.
  • Conclusion.

Commercial Appraisal Salary

Commercial appraisers in the US earn an average yearly wage of $43,866, or $21.09 per hour. The lowest 10% of commercial appraisers earn roughly $28,000 annually, while the highest 10% earn about $67,000. However, the amount of money a business appraiser can earn depends on where they work. Alaska, California, New Jersey, Hawaii, and New York are the top five states for commercial appraiser earnings.

What Do Professionals in Commercial Appraisal Earn In Different Industries?

The following are some examples of commercial appraiser salaries in various industries:

  • The insurance industry pays commercial appraisers an average salary of $51,361 per year.
  • Financial industry revenue is $48,176
  • Commercial appraisers receive the lowest pay from the public sector. Commercial appraisers in this industry make an average salary of $38,685.

Highest Paying Industries For Commercial Appraisers

Rank  Industry  Average Salary  Hourly Rate 
1Insurance$51,361$24.69
2Finance$48,176$23.16
3Real Estate$44,425$21.36
4Government$38,685$18.60

Commercial Appraisal Companies’ Services

The following are examples of companies that offer commercial appraisal services;

#1. CBRE

CBRE is the first company on our list that offers commercial appraisal services. Its valuation services division provides accurate and reliable commercial property evaluations, appraisals, and advisory services around the world, supporting clients in making lucrative real estate investments. These properties range from office buildings to development lots. Among the services provided are Market Value, Initial Public Offerings (IPO), Mortgage Security, Arbitration & Consulting, Taxation, Rental Review, and Transaction Support.

#2. The Cushman & Wakefield

Cushman & Wakefield is the second company on our list of commercial appraisal services. They established the first group of valuation and consulting specialists wholly dedicated to the study of office buildings. Their Office Valuation & Advisory professional group consists of experts in office valuation issues, including more than 60 qualified members of the Appraisal Institute (MAI). 

Multi-Property Portfolio Valuation, Expense Analysis, Feasibility and Impact Studies, Appraisals for Acquisitions, Refinancing, Internal Use, and Estate Purposes are just a few of the services provided.

#3. Valbridge Property Advisors

Yet another company on our list that offers commercial appraisal services is Valbridge Property Advisors. It’s a nationally recognized independent commercial assessment firm with 200 MAIs, 69 locations, and over 675 staff members. They provide objective assessments based on established value methodology, local market understanding, and objective standards.

#4. Bowery Appraisal

Another great company that offers commercial appraisal services is Bowery Appraisal. It is redefining the commercial assessment industry by utilizing big data and a plethora of knowledge. With the help of their innovative technology, appraisers can work more quickly and effectively while still delivering work of unsurpassed quality and consistency.

Ground-up development, multi-family, mixed-use, office, land, affordable housing, industrial & warehouses, retail, condos & co-ops, self-storage, and other services are offered. loans from Freddie Mac and Fannie Mae. ​

#5. Collateral Management

The last company on our list that offers commercial appraisal services is Collateral Management. Collateral management professionals with the necessary qualifications will take your appraisal needs seriously and manage them as skillfully as feasible. The following services are provided: Theme Parks, Gas Stations, Golf Courses, Commercial Development, Hotels, Medical Offices, Multi-Family, Vacant Land, Auto Dealerships, Auto Repair, Car Wash, and Easement Analysis.

Conclusion

A commercial appraisal is one of the checklists that anyone buying a house must meet before making a payment. Sometimes, appraisal result proves that the property was overvalued, and the prospective buyer approaches the seller for a reduction in price. At other times too, it may reveal a lot of damages that need to be fixed. In all, it’s an integral part of every house.

Commercial Appraisal FAQs

How much do licensed real estate appraisers make in Texas?

A real estate appraiser in Texas can expect to make a median annual salary of $74,500. Salary ranges for real estate appraisers in Texas can be anywhere from $29,500 to $199,500, depending on factors such as education level, years of experience, type of company sought, and even tips and incentives.

How accurate are commercial real estate appraisals?

We find that assessments are, on average, 10% higher or lower than the sales prices that occur in the succeeding two quarters. Appraisals are often off by 5% of value, and that’s with a portfolio context that allows for offsetting positive and negative variations.

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References 

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