Buying, Selling, or Just Owning? What to Know About the Commercial Real Estate Appraisal Process

Whether buying or selling, commercial real estate appraisals can play an important role in the transaction because it helps to establish the market value of the property. If the buyer in the transaction will be using borrowed funds to make the purchase, the appraisal will provide data that will help the lender and underwriters decide whether the property value is sufficient for the type of loan the borrower has requested. 

In addition to its value to lenders, buyers and sellers can also learn much from a commercial real estate appraisal performed by a properly licensed appraiser. 

Tracking value offers benefits

Those who own commercial property with no immediate plans of selling may also want to invest in periodic appraisals as a way to track the ongoing value of their property. The data compiled by the appraiser can help commercial property owners make important decisions about making renovations or repairs to ensure their property will continue to compete well with others in the area. Property value information gleaned from periodic commercial real estate appraisers can also be helpful in dealing with property tax assessments and in making decisions about refinancing an existing mortgage. 

Common approaches used to establish value

Depending on the reason for the appraisal and the type of property, commercial real estate appraisals will use one of three approaches to help them establish the valuation. When the appraisal is based predominantly on sales comparisons, appraisers refer to their process as a market data approach. As the name suggests, a market data approach uses information about similarly comparable properties within the general location of the subject property to help them establish value.

While there are some similarities to the market data approach, the income capitalization approach offers appraisers the opportunity to include properties that differ in their primary usage to the subject. For example, two buildings with similar age, space and design could be compared to each other even though one is being used as a restaurant and the other is leased as office space. By focusing on income capitalization, the appraiser can still determine the realistic value of the subject property. 

Commercial real estate appraisers can also use a process called the cost approach to determine value. The cost approach process uses current costs of labor and materials to determine the amount it would cost to build a new building identical to the subject property, plus the value of the lot or land where the building is situated. 

Appraisals can play an important role for owners, buyers and sellers. To learn more, contact a reputable commercial property appraiser in your area.