You’re in the process of buying or selling a commercial property — and you want to know how much the property is worth.
Do you need an appraisal, a valuation, or both?
And what’s the difference between an appraisal vs. valuation anyway?
In real estate, the words “appraisal” and “valuation” are often perceived to be one in the same.
However, there are some differences.
In this blog post, we’ll explain the meaning of each, how they’re interrelated and why they’re important to you as a buyer or seller.
What is an Appraisal?
Commercial real estate appraisals are an objective assessment of a property’s value based on what a property might sell for in the market. These are typically completed by licensed, certified appraisers.
When people hear the word “appraisal,” they generally think of an inspection. However, that’s just one aspect of the process.
The Appraisal Process
The appraisal process may differ slightly from one project to the next, depending on the needs and requirements of the client or lender (the party paying for the report).
However, generally speaking, the following steps usually take place:
Identify the problem or purpose of the report. The commercial appraiser will need to identify the client, intended use, type of value being determined, and the defining property attributes. At this time, the client should also communicate who they would like to receive the final appraisal and how much information should be shared. Appraisals can be used for personal purposes, estate planning/taxes, and to satisfy lender requirements for a loan.
Map out the scope of work necessary. Outline the level of research and analysis that will be performed.
- Collect, verify, and analyze the data. Appraisers gather a variety of information, as well as request information from property owners, to make their assessments. They’ll likely research market area data, comparable sales, public ownership and zoning records, replacement costs, and rental rates, to name a few. The property owner may also be asked for a property tax bill, property drawings, and income statements, among other things. Collectively, this information will be analyzed as it pertains to the property value.
- Calculate the property value. By comparing similar land parcels, the appraiser will estimate the value of the land.
- Determine the value and prepare the report. Based on their analysis and expertise, the appraiser will determine the commercial property’s value and prepare the report. It should follow one of the approved formats outlined by the Uniform Standards of Professional Appraisal Practice (USPAP), which are the ethical and performance standards for the appraisal profession.
Commercial real estate appraisals can be performed on just about any property or land type, including (but not limited to) commercial buildings, apartment buildings, industrial real estate, commercial and land, raw land, or farms.
Depending on the size of the property and information that needs to be collected, commercial property appraisals can take weeks or even months to complete.
What is a Valuation?
All of the information collected and analyzed during the appraisal process is used to determine the property valuation, which is the estimated value of the property or asset.
Outside of an appraisal, you can also pay for a commercial property valuation as a standalone service. Valuations are typically completed by commercial real estate professionals, as opposed to certified appraisers.
There are generally four analysis methods used to determine the most probable price your commercial property may bring in the current market, including:
- Market analysis: Assess the trade area to see how economically viable it is for the property.
- Location & site analysis: Assess the visibility, accessibility, and positioning of any buildings, and topography, in order to understand how consumers interact or will interact with the asset.
- Political and legal analysis: Factor in any political and legal considerations, as well as site limitations, that might influence the success of the land or commercial asset.
- Financial analysis: Determine if there will be sufficient return to cover the cost of the acquisition, potential use of the property, and income-producing opportunities.
Researchers and advisors will lead this process and use the findings to compile a valuation assessment. Valuations are typically more informal than appraisals and have limited uses. For example, valuations cannot and should not be used when determining estate tax implications or for loan justification. You will need to hire an appraiser for those needs.
Who Uses Valuations?
Valuations are important to a variety of audiences, including buyers, sellers, and lenders.
- Buyers: Use a valuation to determine how much an asset is worth in today’s market. This helps you decide how much to pay for it. Additionally, if it’s a rental property, the valuation can help you set appropriate rental fees. Finally, once you own the asset, the appraisal and valuation can also help you make decisions about how much to invest back into the property through renovations.
- Sellers: Determine your asking price, based on the estimated property value.
It’s similar to a residential property in that way, but different in others.
For instance, residential property value is derived from comps (similar properties), and then value is added or subtracted based on unique property details.
Commercial property value is more so based on the income the property is capable of making.
The asset itself is important, but not as important as the potential income relative to the expenses paid out.
Which Do You Need: Appraisal vs. Valuation?
Appraisals and valuations are often used interchangeably because appraisals typically include a valuation.
To understand the slight differences, think about it like this: The appraised value is what a professional appraiser determines a property is worth. The market value is what buyers are willing to pay. Those numbers could be within close range of each other or different.
Determining whether you need an appraisal vs. a valuation depends on how you plan to use it.
For example, an appraisal is a more formal analysis that’s generally produced by a licensed appraiser who has to abide by USPAP guidelines.
If the property is being sold, refinanced or insured or a lender is being used, an appraisal may be required.
A valuation, on the other hand, can be performed by a professional appraiser, real estate agent, or property valuer. The assessment can be used in a variety of ways, such as determining the highest and best options for presenting your property to the marketplace.