Commercial property appraisal work is more complex than the appraisal process for residential properties. Gaining a handle on this process can help you feel more confident about the loan transaction process and get a better sense of what a lender is doing at each stage. In this latest post, we'll explore what you must know about commercial property appraisals.
1. The appraisal is a necessary part of the commercial loan transaction process
Commercial lenders must determine a property’s current value before they can determine whether or not they will approval a loan request. To accomplish this, they enlist the services of certified appraisal companies that are located in the same area as the property in question.
This means that a commercial lender will typically have multiple relationships with certified appraisers, assuming the lender does business nationwide.
2. The lender will typically order the appraisal
Lenders have long-established relationships with appraisal companies and will often insist that they order the property appraisal for any loan request.
This actually does have a few benefits for prospective borrowers. A lender with strong appraiser relationships is more easily able to expedite the appraisal process and keep costs down.
It should be noted that a lender may accept an existing appraisal, provided it was completed recently by an appraiser that can be thoroughly vetted.
3. The appraisal process takes longer for commercial loans
Residential home appraisals are fairly straightforward since one house in a neighborhood can easily be compared to those in the immediate vicinity.
But commercial properties are unique – one city block may contain an office building, a mixed-use property, and a small warehouse. Since a commercial property can’t easily be compared to those around it, the process can take weeks instead of days.
The final appraisal document for a commercial building is typically about 100 pages long. Compare that to the 10 or so pages of a residential appraisal and it’s easy to see why the process takes a significant amount of time to complete.
4. There are several appraisal approaches
Commercial property appraisals are usually performed according to 3 distinct approaches: cost, income capitalization, and sales comparison.
The cost approach will give the lender an estimation of a property’s value by determining the cost one would have to pay to replace it.
The income capitalization approach provides a market value based on the income that a property can generate.
Finally, the sales comparison approach is used by appraisers to determine the value of a property based on recent transactions in the neighboring area.
In practice, appraisers take aspects of each approach to help them arrive at a property’s estimated value.
5. Appraisal fees are often charged at closing
Commercial appraisal fees vary, but you can expect to pay around $2,000 - $3,000. This fee is often charged at closing, along with insurance costs, origination fees, and any other closing costs.
You can always ask a prospective lender to give you a detailed list of all possible fees. That information could help you make a more informed decision as you choose between lender solutions.
If you have any additional questions regarding the commercial mortgage appraisal process, don’t hesitate to contact us here.