Commercial appraisals are necessary because, in most cases, the buyer and seller are working towards different outcomes. The buyer wants to pay less, while the seller is looking for the opposite effect – to have the price be as high as possible. This is where a commercial appraisal comes in as the third party that determines the “fair market value” for the commercial property being sold.
The appraiser is called upon to perform market research and come back with an independent value. This fair market value is then used by both the buyer and seller in the transaction for negotiation purposes, as it is considered the generally agreed-upon current value of the property. This makes the fair market value an important part of any commercial appraisal.
In this Brisky blog, we describe what commercial appraisals are, when they are needed, and how they can help. Keep reading to learn more!
What Are Commercial Appraisals?
“Commercial appraisals are the independent assessment of the value of a commercial property. This property could be anything from land to garages to warehouses, multifamily homes, or office buildings.”
Commercial appraisals are performed by the ‘appraiser’ who goes through significant training to learn the rules and practices required to complete an appraisal report accurately and correctly. This type of appraisal is used in many real estate transactions, such as when a property is being sold, refinanced, or insured.
When Are Commercial Appraisals Necessary?
When Buying or Selling a Commercial Property:
If you are buying or selling a commercial property, a commercial appraisal can help you determine the fair market value of the property, which can in turn help you negotiate a fair price and avoid overpaying or underpricing the property.
When Financing a Commercial Property:
If you are looking for financing, like a mortgage or a loan, potential lenders will likely require a commercial appraisal to determine the value of the property. This helps the lender assess the risk of the loan as well as determine the correct loan amount.
For Tax Assessment Purposes:
If you are a property owner, a commercial appraisal can help you assess the value of your own property for tax purposes. This can help you check that you are paying the correct amount of property taxes, so you aren’t hit with a big bill during tax season.
For Insurance Purposes:
If you are insuring a commercial property, an appraisal will help you have a more concrete idea of the replacement value of the property. Knowing the accurate value of the property will ensure that your insurance coverage is enough, in case of damage or loss.
Overall, getting a commercial appraisal can provide you with valuable information about the value of your property, which can help you make informed decisions about buying, selling, financing, insuring, or planning your estate.
Most Important Things to Know About Commercial Appraisals
- The fair market value is based on several factors, such as the commercial property’s location, condition, size, recent sales, the market, and potential income.
- While the process of a commercial appraisal typically involves a physical inspection of the property, it goes much deeper than that, as the research for the local real estate market can drastically change the valuation. In addition, an analysis of comparable properties that have recently sold can also affect the appraised value. The appraiser synthesizes all the above information and more to calculate the property’s value.
- Commercial appraisals are governed by industry standards set by organizations such as the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice (USPAP). These standards ensure that appraisals are conducted in a consistent and ethical manner. Commercial appraisers must be licensed or certified by their state, and they typically have a degree in real estate, finance, or a related field. They also undergo continuing education to maintain these credentials.
Commercial Appraisal Approaches
The Cost Approach
The cost approach assumes that the price a buyer is willing to pay for a property equals the cost it would take to build an equivalent property. So, to arrive at a value, the appraiser looks at the time and materials used to construct an investment property and estimates the cost (using market knowledge and available data).
The cost approach is often the most used and effective for new properties because the reproduction cost should be similar. However, this is less effective for older properties or that cannot feasibly be replicated in modern times.
The Income Approach
The income approach is the same as above; however, the value of the commercial property is determined by the amount of income it generates. To estimate this, the appraiser reviews cash flow like past financial statements, current rent, leases, operating expenses, and market conditions.
The main benefit of this approach is that it can be used across property types and is relatively simple. The downside is that relying on historical financial accuracy can be challenging, and it may require assumptions about things like rent, expense growth, the future of the market, and vacancy rates.
The Sales Comparison Approach
The sales comparison approach is just as it sounds – that the property’s value is derived from the sales of comparable properties in the same market.
However, it can be difficult to find commercial properties in the same market that are truly comparable or even similar, as location, renters, and slight differences in size, use, or design, can cause drastic changes in value.
Partner With Brisky Net Lease for Your Next Commercial Real Estate Investment
For help finding the perfect NNN investment property, get in touch with the professionals at Brisky Net Lease. Our experienced, professional team can identify the best properties in the best locations — helping you meet your investment goals.
With our extensive commercial real estate track record, you’ll walk into your next lease negotiation confidently and with an experienced team on your side.