Will an Appraisal be required?
An appraisal is generally required by a lender, prior to loan commitment, to determine that the requested loan amount is falls within the lender’s loan to value (LTV) guidelines. An appraisal for a commercial property is usually performed by an MAI® appraiser who is not only a state-licensed individual trained to render expert opinions concerning property values, but who is also a Member of the Appraisal Institute®. In an appraisal, consideration is given to numerous factors including, 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:
- to establish the replacement cost (insurance purposes).
- to contest high property taxes.
- to settle a divorce.
- to settle an estate.
- to use as a negotiation tool (in real estate transactions).
- to determine a reasonable price when selling real estate.
- to protect your rights in an eminent domain case.
- 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, the potential net income of the property is capitalized to arrive at a property value. 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, the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the subject property, as new on the date of value, less accrued depreciation the building suffers in comparison with a new building. This approach is only used, in conjunction with the Sales Comparison (market) Approach and 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.
After a thorough exercise of the three approaches, and usually just the first two approaches, a “reconciliation” of the values is made and a final estimate or opinion of value is determined. 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.
May I use another lender after the appraisal has been completed?
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, however, because there is clerical work involved in editing the appraisal to reflect the lender. 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, and hence do not wish to be bound by the appraiser’s valuation of their property. The real estate agent, who receives a percentage of the sales price as compensation and often represents the seller in the transaction, normally 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 and 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.