Business property owners have a lot to consider when buying or selling commercial property. Each commercial real estate holding is different. There are numerous factors that affect its value, including: supply, demand, location, regulations, design, age, space, and more. Commercial real estate appraisals and valuations differ quite a bit from the approach to residential property appraisals. Much of the value derived from residential property is the land in which the home sits upon, whereas much of the value derived from commercial property is its cash flow potential. Finding the true value of commercial property takes a lot more knowledge and experience. Here is a list of 10 things you need to know about commercial real estate appraisals:
Property inspection is just part of the appraisal process. Depending on its size and complexity, it may take from less than an hour to half a day to inspect the property. Appraisers also research ownership records, zoning records, demographics, comparable sales, replacement costs, rental receipts and much more to determine the value of the property. Finally, they write an appraisal report on their findings. The entire appraisal process may take several days to several weeks.
Don’t misrepresent the facts. Commercial real estate appraisers are professionals who verify everything. Report generated by an appraiser may be used in court cases and legal proceedings. They may have to defend their opinions, so they do their best to be as accurate as possible. If you misrepresent important information, the appraiser’s job becomes much more difficult.
Don’t withhold information. You will probably be asked to provide property tax bills, property drawings, income statements, and other things. There are a number of important documents that are required to prepare an accurate valuation of commercial property. Appraisers have no interest in expanding their files of data beyond what is necessary. Their primary objective is to develop an accurate valuation of a property. If you withhold requested information, the appraiser’s job becomes much more difficult.
Commercial property appraisers must follow a strict code of ethics. In order to maintain their license, appraisers must follow the Uniform Standards of Professional Appraisal Practice (USPAP), which, among other things, requires them to provide an unbiased opinion.
The client orders the appraisal. Appraisers are obligated to maintain client confidentiality, so if you not the client, the appraiser cannot release the appraisal report or any other confidential information to you without prior consent.
Identify the intended audience. Make sure the appraiser knows who you want to use the report. These people or parties will be identified in the appraisal report and are the only ones who are authorized to use the appraisal report.
There are three types of reports. A “Restricted Use Report” is the shortest and least expensive type but it can only be used by the client. A “Summary Report” summarizes the data and analysis and can be used by any intended user. A “Self-Contained Report” contains all the details of the data and analysis. If you tell the appraiser how you intend to use the report, he or she can guide you as to what type of report you will need.
Report Type is separate from Scope of Work. The amount of work required to develop valuations does not depend on the type of appraisal. With a restricted use or summary appraisal, the appraiser will compile large amounts of information that are retained in a work file but are not included in the report, therefore the final report does not necessarily indicate the volume of work required to generate the report.
Consider the date of valuation. It is important to establish the correct date the appraisal was performed. Events such as hazardous spills, storm damage or economic changes can significantly change the value of a property.
What is your interest in the property. Do you want to purchase a property free and clear? Do you want to know its value based on income from full occupancy? When the property appraiser knows the purpose of the valuation, he or she can ensure that the primary goal is fulfilled.