Borrowers approaching their first commercial mortgage transaction may wonder how similar the process is to the one they may have experienced when obtaining their residential mortgage.
The truth is that commercial and residential lending are quite different in a few key ways.
A perfect example of this reality involves the property appraisal process.
Residential real estate appraisals are fairly straightforward in nature since one house in a neighborhood can easily be compared to those in the immediate vicinity.
On the other hand, the commercial properties located on one city block may vary greatly. Just think of the many differences between warehouse, mixed-use, office, and apartment properties.
The complexity of the commercial process is the main reason why appraisals can be about 100 pages long and take several weeks to complete. As a result, they can cost upwards of $3,000.
Want to learn more? Keep reading to get a quick rundown of what appraisers look for when evaluating a commercial property.
Why Get Appraised?
The purpose of a commercial property appraisal is to establish the market value of a commercial property. The collection of information gathered about the property helps create a baseline metric for lenders seeking to make an approval decision on a borrower’s funding request.
The mortgage appraisal will be needed throughout the property’s lifespan. It is consulted for tax assessments and appeals, lease negotiations, when finding an appropriate selling price, for mortgage lending purposes, commercial real estate counseling, and more. The commercial appraisal stands as the property's fundamental hub of data and is utilized time and time again.
Who Orders the Appraisal?
While the process differs depending on the institution, in many cases the lender will purchase the property appraisal.
This can make life easier for business owners and investors who are new to commercial lending. Lenders develop strong appraiser relationships over time and are able to expedite the process. In many cases, they can work with the appraiser to keep costs down as well.
The Initial Inspection
The appraisal process begins with a professional inspection. The scope of this process varies depending on size, type, and function, but it generally takes a couple of hours. During this time, the property will be evaluated on many different grounds - function, size, capacity, condition, electricity, sanitation, and so on.
The initial inspection establishes the framework for the entire mortgage appraisal. Appraisers will consider what the intended use is and what needs to be adjusted or repaired.
Once the inspection is completed, the real work begins. The appraiser will then spend either days or weeks collecting data from the property’s past. Research is conducted regarding the property’s public records, zoning laws, previous ownership and use, market area data, scarcity, sales, utility, rentals, purchasing power, and more.
There are a few standard types of approaches appraisers take when performing a commercial real estate appraisal: cost, income capitalization, and sales comparison.
Cost Approach: This approach gives lenders an estimation of a property’s value by determining how much one would have to pay to replace it.
Income Capitalization Approach: This approach provides a market value based on the income that a property can generate.
Sales Comparison Approach: This approach is used by appraisers to determine the value of a property based on recent transactions in the surrounding area.
An appraiser may incorporate each approach as they work to determine a commercial property’s market value.
Obtaining the Report
Once the appraisal report is completed, it is confidentially disclosed to you. The commercial appraisal can then be shared with a lender or whoever else you authorize to receive the document.
Have Additional Questions?
The commercial mortgage property appraisal is just one aspect of the transaction. If you’re new to commercial lending – or you’d simply like to learn more – don’t hesitate to contact us today.
By sharing some basic information about your property and financing request, our experts can help you feel more confident about getting a loan that really works for you.