Why are Commercial Investment Property Appraisals so Unique?

Commercial shopping district on sunny day

Commercial property is one of the best ways to build a solid foundation of wealth and financial stability. While nothing is guaranteed, commercial property can bring profit margins above and beyond the financial gains that come with residential property.

Whether you are buying commercial property as part of a portfolio of rentals or buying for your own use, you will likely need a loan. And one of the most essential parts of the commercial-loan process is the appraisal.

What All Investors Need to Know About Commercial Investment Property Appraisals

If You Get a Loan for a Commercial Property, Expect an Appraisal

For residential property, appraisals are common, but there are situations when you can proceed without it. With commercial property, however, there is practically no chance that the loan will proceed without a professional appraisal. Like a typical home sale, lenders essentially need to know the value of the property before they write the loan; with commercial property, lenders need to know the value of the property, as well as many other details that can be worked out in the appraisal process. 

Appraisals for Commercial Property Usually Takes Longer

The appraisal of a residential home is fairly simple: the appraiser simply wants to determine how much a potential buyer will pay for the home. Because homes in neighborhoods are usually fairly similar, establishing a basic price range is easy.

But commercial properties have a lot more variety, and one block of commercial lots can have properties that are used for a wide range of purposes. Commercial property is rarely and apples-to-apples comparison, so the process of determining a value is complicated and can take weeks, instead of the days that it usually takes for a residential appraisal. In many cases, an appraisal document for a commercial property is over one hundred pages, while the same document for a residential property is only ten pages.

The Appraisal will Combine Cost, Income Capitalization, and Sales Comparison

To appraise a commercial property, a trained appraiser will use three different methods…

  • Cost: This is the most basic appraisal approach, and it’s the one that is closest to the residential-loan appraisal. This is simply an estimate of the property’s value on the open market. In some cases, this method can be unpopular, because it often uses as its basis the cost to construct the property and building. Basically, it assumes the buyer should not pay anymore than it would cost to build the property themselves. This means the cost approach does not allow for profits for developers and construction companies.
  • There are a lot of factors that go into commercial property appraisals.

    Income Capitalization: This approach to an appraisal involves the consideration of potential cash flow, as well as the potential financial risks for owning the property. It takes the appraisal process a step further and analyzes the profitability of the commercial property. Basically, the value of the property is not only determined by the cost value, but also the ability for the property to make money for the owner.

  • Sales Comparison: Comparing nearby properties is not always reliable, as you may have office space next to a warehouse next to a retail store. Obviously the profitability for these three different locations is unique, so comparing them from an income-capitalization standpoint can be flawed. With the sales-comparison method, the appraisal takes into account what investors have paid for similar properties. This method considers the types of properties that are like the one being sold, and it can include factors like condition, location, size, floor plan, surrounding area, and overall purpose. People in the real estate industry often feel that this is the most accurate and reliable method for appraising a property. 

There are Generally Three Types

Not only are there three methods for appraising a property, there are also three types of appraisals that are conducted…

  • Restricted-Use Report: The first is a restricted use report, which is the shortest and most affordable type available. While the fees for this appraisal are lower, it does not include many of the details that come with other appraisals.
  • Summary Report: This appraisal summarizes the information so it can be used by any user, making access and implementation more convenient.
  • Self-Contained Report: This is an appraisal report that contains all the details of your property, including the data and a detailed analysis, which can be helpful for borrowers, sellers, and lenders.

Appraisals are Needed for Many Reasons

The truth of the matter is that appraisals for real estate property are needed for many reasons, reasons that are often not present for residential property. For example, it can help seller decide an acceptable selling price, and guides buyers to an appropriate offer. It also assists in the underwriting of the loan, as lenders know the value of the property on which they are writing a loan. All of these apply to both commercial and residential property, but there are aspects that apply only to commercial.

For example, the appraisal can be used to support lease prices and help with business dissolutions. It can aide in corporate mergers, stock issuance, or the revision of book value. It can also be used to help zoning boards, courts, and planners regarding the probable effects of a proposed action.

Additional Inspections Will Likely Be Required

In addition to the appraisal, you can also expect to pay for additional inspections on the commercial property. Both the time and price of an appraisal will depend on many factors, including the size and nature of the property in question, so it helps to seek an inspection as quickly as possible. This information will often be factored into the appraised value, so it serves to protect both the buyer and the lender, while ensuring the seller is delivering a property that meets the appraised value.

Enhance Your Portfolio with an Affordable Commercial-Property Loan

If you need a loan for a commercial property, contact San Diego Purchase Loans today. From small loans for a tiny retail shop to jumbo loans for large commercial centers, we’ll help you find the right mortgage on any commercial property.

LEARN MORE ABOUT LOANS FOR COMMERCIAL PROPERTY!

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I hope you enjoyed reading this article. It's my goal to keep you updated with the latest real estate mortgage news. I'm proud to provide you with 100% original and unique content. Subscribe now to get high quality real estate mortgage content and articles delivered directly to your inbox. Chad Baker is Regional Manager for LendUS. Chad is consistently recognized in the top 1% of mortgage originators in the United States 2011-2017. Got a question for Chad? Call (858) 353-8331 or submit your question online