If you are a home-owner, then at some point you have probably been exposed to the appraisal process. Of course this is a necessary step in order to obtain a loan. One might think that the process is the same when obtaining a commercial loan. Many aspects are the same, but, as shown below, due to added complexity, there are some differences as well.
1. The Appraisal is a Lengthy Process Involving Many Steps
Although the property inspection is important, it is only the beginning of the process. Large amounts of data needs to be uncovered in a commercial property in order to provide a well supported value. Aside from investigating recent sales and rental data, appraisers research zoning records, taxes, regional/neighborhood demographics and market demand/supply analysis. Because of this, the creation of the appraisal report and the property value can take two to three weeks, depending on the complexity of the property
2. Be Prepared to Answer a Lot of Questions and to Provide Information
Appraisers are kind of like professional sleuths. The goal is to put several pieces of the puzzle together in order to solve a problem. So be prepared to provide data about the property: income/expense statements, plat of survey/legal descriptions, building layouts and a list of deferred maintenance items, along with any recent renovations or repairs.
3. Appraisers Must Adhere to a Strict Code of Ethics
You might here an appraiser refer to something called USPAP. This stands for the Uniform Standards of Professional Appraisal Practice, and it is a set of ethics and rules that every appraiser is bound by state law to follow.
The two questions that I get asked most often are:
Can you appraise my property for $XXX value? and,
Can I have a copy of the report?
The answer to the first question is ABSOLUTELY NOT. An appraiser’s integrity is everything. Despite the fact that a client may want a certain value, the appraiser is bound by law to provide an independent, unbiased value, even if it means the client may be unhappy with the result.
The answer to the next question is, “Maybe”. Every appraisal must specify the intended users. If a report is being done for a bank for loan decisions, then, in most cases, the property owner is not entitled to the report results. The intended users are entitled to confidentiality and appraisers are bound to honor this. It is imperative at the outset to thoroughly list all intended users of the report, so there are no misunderstandings down the road.
4. There Are Two Types of Reports
A “Restricted Appraisal Report” is the shortest report, and will state conclusions. However, it may not include sufficient support data or information to follow the appraiser’s conclusions. For these reasons, it can only be used by the client.
An “Appraisal Report” summarizes the appraiser’s analysis and the rationale for the conclusions. This report type tells more of a story and provides necessary support for the conclusions. It is easier to follow the rationale and logic, and is the most commonly used report format.
5. Date of Valuation is important in an appraisal
The date of valuation is a very important component of the report. Many times it is necessary to value a property as of a date in the past. This is a retrospective appraisal and is often used in tax and estate scenarios. It is important to note the conditions present at the date of evaluation as compared to the date of inspection. A prospective appraisal determines market value as of a future date and usually considers construction of new property improvements, and time it takes to “stabilize” or lease-up a property to market occupancy levels.
6. Most Appraisals are Fee Simple or Leased Fee
Fee Simple is absolute ownership unencumbered by any other interest or estate. It is the highest ownership interest possible that can be had in real property. For an owner-user property, Fee Simple is the most common value sought. In the case of a leased property, fee simple interest is determined by applying market rents to the net rentable area.
Leased Fee is defined as the ownership interest that the landlord maintains in a property under a lease with the rights of use and occupancy being conveyed or granted to a tenant. It is the ownership interest in a leased property. In this case, lease contract rents are applied to the property to determine its value.
Hopefully this takes some of the mystery out of the appraisal process and will help you ensure a smooth appraisal process in the future. Would you like more information? Please Contact Us Today!
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