Buying a commercial real estate property can be a complicated process. There are a myriad of factors to consider as a potential buyer. When you navigate the subsequent purchasing process, you will encounter continuous pieces of data, numbers, and critical information. Unless you have the industry knowledge, conducting a commercial appraisal may seem challenging for the ordinary person.
Real estate appraisals an be pretty intricate, depending on the various circumstances surrounding the property. Being an informed buyer or seller is key to the overall transaction process. By doing your due diligence, you will learn more financial information about the property through the commercial appraisal. The data you extract from the commercial appraisal will help when estimating a property’s true value.
Here is a guide to help you understand more about the basics of commercial appraisal services:
What is commercial real estate appraisal?
The value of a real estate property is a critical component. This data helps tremendously when evaluating areas such as financing or insurance. In order to reach upon a specific value of a property that is mutually-amicable for all parties, a commercial appraisal will be required.
In the most basic of senses, a real estate appraisal involves estimating the true value of a property. Sometimes, the selling price may be agreeable between the seller and buyer. However, insurers may have a differing opinion on the presented estimations. To reconcile these differences, the commercial appraisal collects a qualified evaluation of the property from a knowledgeable industry expert. These real estate appraisals are unbiased calculations in nature.
How do appraisals work for commercial properties?
As mentioned previously, all parties involved in the property transaction have to come to an agreement surrounding the commercial property’s value. The circumstances that determine this value can differ from property to property.
For example, an appraisal can take into account recent sales information for adjacent properties in the area. Moreover, the condition of the property itself is key, and could make or break the final agreed upon price. Other market conditions can influence the appraisal, such as the property’s geographical location.
There are different approaches to real estate appraisal. Each type of real estate appraisal has its strengths and weaknesses. If you are preparing to sell your commercial property, preparing it in advance can help increase its overall value. Conversely, taking a look at a poorly-maintained property can prevent you from making a bad investment. This is why it’s so important to do your research on available appraisals, but ask for professional advice too!
We’ll go over several of the more common appraisal techniques, including the sales comparison approach, the cost approach, and the income capitalization approach.
Appraisal by sales comparison
A frequently used type of real estate appraisal commonly is the sales comparison approach. It is the most common appraisal to be used in determining a property’s value. This is because it might also be the simplest: the value is determined by looking at similar, nearby sales.
Although this may be a generalized way of looking at things, it isn’t the be-all and end-all. Since no two properties are alike, individual conditions pertinent to the property in question will be evaluated. Sales reports and adjacent characteristics are used as a general starting point by appraisers. An accurate value, therefore, can be almost entirely based off of this assessment.
Appraisal by cost
In terms of evaluating a property’s value by its literal cost, this would be the next common type of commercial appraisals. A cost appraisal is exactly as its name implies: you have to estimate the cost of building the same property. Essentially, this entails figuring out the cost of construction, while adding in the value of the land.
Commercial appraisers use two methods in the cost appraisal approach. First, there is the reproduction method, which considers the quality of tools and materials used to construct the property. Then, there is replacement method, which assumes that the previous technique utilizes modern building techniques.
Appraisal by income capitalization
While the cost and sales comparison approaches use transaction-based factors to generate a value, this type of commercial appraisal doesn’t. Should the property in question be used to generate income in some form, an income capitalization appraisal will be used. As a result, this might be a rather difficult appraisal to utilize.
It boils down to using the property’s original market value to estimate the appraisal itself. Utility costs and income streams will differ from property to property, making the assessment harder. However, by dividing the net operating income by a determined capitalization rate, it can be done quite accurately.
Even if an income capitalization rate isn’t pursued, all three types of real estate appraisals are important. For a transaction to be considered final, all parties involved in the process will have to agree with the appraisal. If not, it may be time to go back to the drawing board.