10 Things to Know About Commercial Real Estate Appraisal
A commercial real estate appraisal can be complicated–from knowing what to ask for as well as what to provide to the appraiser–here's what you need to know.
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Small business owners have a lot to digest when it comes to the subject of commercial real estate—especially these days. That goes double for the notion of obtaining an appraisal on a piece of commercial real estate, a process that can differ quite a bit from appraisals done for residential properties. "Commercial is very different from residential in the fact that appraisals are much more subjective in nature," says Scott Everett, founder and president of Supreme Lending, a mortgage lender in Dallas. "Much of the value derived from a commercial building is based on the rental rates received relative to the expenses paid out. The underlying asset is important, but not even close to the same way that a residential properties value assets."
In other words, if you're looking to get an appraisal done on a piece of commercial property—perhaps because you want to buy or sell it or even because you want to establish a value of a lease or lodge a property tax appeal—there could be a bit of a learning curve in knowing what you're about to embark on. Inc. contributor Darren Dahl asked Douglas McKnight, a 22-year veteran commercial real estate appraiser and managing director at CapStruc Valuation in Malvern, Pennsylvania, for some insight into his profession. What follows is a list of the top 10 things McKnight says you need to know about commercial real estate appraisals:
1. The Inspection Is Only a Small Part of the Appraisal Process
Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.
2. Don't Try to Misrepresent the Facts
Appraisers are professional skeptics. They will seek to verify anything that you tell them from other sources. McKnight says he often ask questions that he already knows the answer to just to test the credibility of the people showing him the property. Appraisers are always thinking about how they will defend their opinions if they are ever brought to court, even in assignments in which litigation appears unlikely. If you misrepresent anything, the appraiser will discount the credibility of anything else that you say.
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3. Don't Withhold Information
You will probably be asked if you can provide a property tax bill, a set of drawings of the property, income statements, and other things. You might not know why an appraiser is asking you for something but it is best to provide whatever you can. Appraisers have no interest in unduly expanding their work files but they do need certain information and the more you provide, the more quickly they can complete the assignment. If you subsequently dispute the appraisers value opinions and produce additional information that wasn't provided from the onset, you have wasted valuable time.
4. Appraisers Must Adhere to a Strict Code of Ethics
Appraisers must follow the Uniform Standards of Professional Appraisal Practice, which, among other things, requires them to provide an unbiased opinion. Failure to follow this might result in disciplinary action from the state, including revocation of an appraiser's certification. If an appraiser refuses to do something that you ask for, it is probably because of the obligation to adhere to these ethics.
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