Does my transaction require an appraisal?

Lenders require appraisals prior to loan commitment in most every case.  The commercial funding source needs to determine that the requested loan amount falls within the lender’s loan to value (LTV) guidelines.  MAI® appraisers perform commercial property appraisals.  MAIs state-licensed individuals trained to render expert opinions concerning property values.  MAIs are also Members of the Appraisal Institute®.  A commercial appraisal considers numerous factors.  These include, but not limited to: the subject property, its income and expenses, its location, its age, its amenities as well as its physical conditions.

Why get an Appraisal ?

The most common reason for ordering an appraisal is to obtain a loan on a property. However, there are several other reasons why an appraisal might be needed.  Below are just a few other reasons which include to:

  • establish the replacement cost (insurance purposes).
  • contest high property taxes.
  • settle a divorce.
  • settle an estate.
  • use as a negotiation tool (in real estate transactions).
  • determine a reasonable price when selling real estate.
  • protect your rights in an eminent domain case.
  • order it because a government agency requires it.

What are the various Appraisal Methods?

Appraisers use three common approaches when establishing the value of a given property:

Sales Comparison Approach

In this approach, the appraiser identifies 3-6 comparable properties in the neighborhood which have recently been sold. Ideally, the properties are close in vicinity (within a 3 mile radius of the subject property) and have sold within the last 6-12 months. The appraiser then compares the sold properties to the subject property and makes monetary adjustments for the differences. The factors used in the comparisons include square footage, number of units, property age, lot size, view, and property condition, etc.

Income Approach

In this approach, we arrive at a property value by capitalizing the potential net income of the subject property.  This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization.

Cost Approach

In this approach, there is a used to arrive at the property value.  We take Value of the land (vacant), added to the cost to reconstruct the subject property, as new on the date of value.  We then subtract the accrued depreciation the building suffers in comparison with a new building.  The Sales Comparison (market) Approach is used in conjunction with this approach.  We use the Income Approach IF the subject property is 5 years old or newer.  If the subject property is older than 5 years, this approach will not be used.

An appraiser determines a final estimate or opinion of value after a “reconciliation” of the various valuation methods..   This is after a thorough exercise of the three approaches, and usually just the first two approaches.  While most appraisers intend for their appraisals to be objective, many times an appraisal can be subjective and therein lies the rub and the single largest difficulty in today’s commercial loan financing is the valuation. If the appraisal comes in too low, the loan may very well not go forward. Fortunately, low ball appraisals are relatively seldom.

Who owns the Appraisal?

Even though the borrower pays for the appraisal, the lender actually owns it.  This is because the lender orders the appraisal on the borrower’s behalf.  And, the appraiser lists that lender on the appraisal report.  However, the borrower has the right to receive a copy after the loan is funded.

Once thehe appraisal has been completed, may I use another lender?

It is certainly possible. In most cases, changing the lender does not mean you will have to pay for another appraisal.  The first lender can conceivably transfer the appraisal to the new lender.  Some appraisal firms may charge a small fee.  Editing the appraisal to reflect and/or to assign the appraisal to a new lender requires clerical work.  This fee is called an “Appraisal Retype Fee.”  However, the lender who first ordered the appraisal has the right to refuse to transfer the appraisal to another lender.  In this event, an entirely new appraisal would be required.

Who determines the sales price of commercial property?

The seller of the property is the person who sets the price of the property, not the appraiser. This is because sellers normally do not order an appraisal when selling their property. Sellers wish to obtain the highest selling price possible for their commercial properties.  Hence, they do not wish to be bound by the appraiser’s valuation of their property.  The real estate agent receives a percentage of the sales price as compensation for selling the subject property.  Often the agent represents the seller in the transaction.  Furthermore, most commonly the agent assists the seller in setting the sales price.

Typically, the seller’s real estate agent performs a comparative market analysis (CMA).  The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser’s license or certification.  A CMA is a necessary part of the agent’s preparation for a listing.  It consists of examining sales of properties in the area to arrive at a listing price.  The reliability of the CMA depends upon the agent’s experience and the characteristics of the property and the surrounding area.  Typically, the agent will suggest a selling price to the seller based upon the analysis.  However, the seller may not accept that price and choose to list the property for a higher price.