There is a big difference between the way residential and commercial properties are appraised. Commercial real estate appraisal is more subjective than residential appraisals.
The value of a commercial building largely depends on the rental rates paid and the expenses involved in maintaining them.
While the underlying asset plays an important role, it is not as significant as in residential properties.
Whatever it is that prompts a small business owner to seek an appraisal of a commercial property, it is important to understand that it may require a steep learning curve. Here are the important things to know.
Inspection Plays a Small Role in the Entire Process
Inspecting a commercial property may take anywhere between one hour and several hours depending on its size and complexity while the entire appraisal process may take a few days or several weeks.
Factors such as safety hazards and even bed bugs can potentially result in personal injury lawsuits against landlords and other property owners without sufficient inspections and accurate appraisals, making this process necessary.
The inspection is only the beginning of the process.
Other aspects include investigating lifestyle and demographic information, researching zoning and public ownership records, and compiling comparable rentals, replacement costs and sales.
Present the Real Facts
Appraisers do not accept what they are told without verifying them from different sources. Sometimes they may even ask questions whose answers they already know to test credibility.
After all, they must be always prepared to defend themselves in court even when it does not appear that an assignment may lead to litigation. A single misrepresentation will cast doubt on all other things said.
Provide All Required Details
Appraisers may ask for things that you may think are unnecessary, including income statements, property drawings and tax bill. However, the more information you provide, the faster the appraiser will be able to complete an assignment without the need for a dispute.
Strict Codes of Ethics Guide Appraisers
If an appraiser refuses to do what you want, do not take it personally. They must adhere to the Uniform Standards of Professional Appraisal Practice, which has strict requirements, including the provision of unbiased opinions.
Appraisers who do not comply face disciplinary actions that may even lead to revocation of certification.
Appraisal is Ordered by the Client
Appraisers must maintain the confidentiality of their clients and will not divulge sensitive information without their permission.
Identify Intended Users
The appraisal report needs to identify the parties that are authorized to use it; so you must let the appraiser know who these people are.
For example, a property buyer may share the report with the seller, lender and local property tax appeal board.
Determine the Type of Report Required
They way you intend to use a report will determine the appropriate report. Only the client uses a “restricted use report,” which is the cheapest and shortest. Any intended user can use the “summary report.
Another report that people rarely request is the “self-contained report” that contains all details.
Scope of Work
The type of appraisal report required does not determine the amount of work involved.
Establish Valuation Date
Appraisers can perform prospective, retrospective or current appraisal based on the valuation date.
Identify Your Interest
Appraisers will value property depending on the interest that you have in the property. You may want to know the value of an empty or occupied property.