Real estate investors must obtain a commercial real estate appraisal of the subject property before receiving approval for a loan to purchase any commercial real estate.
What Exactly Is a Commercial Real Estate Appraisal?
A third-party professional appraiser conducts commercial real estate appraisals to determine a property’s value. Any commercial real estate, such as office buildings, multifamily apartment buildings, and retail structures, can be valued under this type of appraisal.
Lenders will require applicants to receive an appraisal of a commercial real estate property before they are authorized to buy it. A mortgage for residential property works the same way. Ensure that the brokerage only lends money as significant as the property’s fair market value. The CRE appraisal is a more detailed evaluation that considers the future earning power of real estate. Residential real estate evaluations are often performed with comparable properties in mind.
6 Valuation Techniques For Commercial Real Estate Appraisals
A business property’s worth is assessed by a commercial real estate appraiser, or CRE appraiser, who considers several variables. To value commercial property, an appraiser can employ one of six techniques.
1. INCOME CAPITALIZATION APPROACH
The income capitalization approach is the standard valuation method used to value commercial real estate. The appraiser determines the potential income from a business on this property by comparing it to the earnings of comparable properties.
2. COST APPROACH
In commercial real estate appraisal, the cost approach determines how much a property would cost to construct in the present market. This is done by considering land prices, construction costs, labor costs, and anticipated depreciation.
3. MARKET APPROACH
Sales comparison methodology is another name for this technique. An appraiser compares the property against nearby comparable homes’ sales values while also considering the current market.
4. GROSS RENT MULTIPLIER APPROACH
This method evaluates the gross rent of nearby properties to arrive at an estimated value for the property, just like the market approach does. This approach involves dividing the property’s estimated income by its projected value.
5. VALUE-PER-DOOR APPROACH
A commercial real estate valuation approach that determines the value per unit in the building is often used to value apartment complexes or other commercial rental properties.
6. VALUE-PER-RENTABLE-SQUARE FOOT APPROACH
This method gives renters and tenants a projected value per square foot to use when valuing rental properties.
WHAT ARE THE DIFFERENCES BETWEEN RESIDENTIAL AND COMMERCIAL REAL ESTATE APPRAISALS?
Appraisers value commercial and residential real estate in various ways that differ from one another.
- METHODS – When valuing residential or commercial properties, appraisers will weigh into account a variety of factors. When evaluating residential real estate, an appraiser will broadly consider location, the home’s size and condition, similar sales, and comparable properties (comps). When valuing commercial assets, the appraiser will also consider the property’s intended use, potential revenue streams, and rental projections.
- EVALUATION REPORT – Commercial property reports are more complex than residential property reports and are created differently. Because commercial properties must uphold criteria to stay functional and lucrative, commercial property appraisals typically include additional information regarding the property’s potential future effectiveness.
- COST – Evaluating a business structure often costs extra due to the complexity of the commercial property appraisal. A CRE appraisal will often take an appraiser longer than a commercial real estate evaluation.
CONCLUSION
You’ll need to have an assessment if you’re selling your medical office building and you’ve accepted an offer from an investor. A commercial appraisal is similar now. When the time comes, you should know a few factors regarding your business facility.
