Commercial real estate investing can be challenging since everyone involved must agree on an appropriate property appraisal. The best way to value a CRE is to obtain the services of a professional third-party appraiser to determine its value. Commercial real estate varies in size and other factors influencing the appraisal fee.
Commercial real estate (CRE) appraisal fees vary and depend on how long it takes, the type of property, access to property, and other factors. CRE appraisal fees cost from $2,500 to $3,500 and upwards. Cost, Sales Comparison, and Income Capitalization are the three most used appraisal approach methods.
Appraising a CRE is a lengthy and meticulous exercise and requires a professional to determine its value. Many factors influence a commercial real estate’s appraisal fees, and owners, investors, and lenders must know what will influence its cost.
How Much Does A Commercial Real Estate Appraisal Cost?
There are several reasons to get an appraisal on commercial real estate, and various factors influence the cost of such an appraisal. Depending on these factors, a CRE appraisal can cost from $2,500 to $3,500 and upwards. A CRE appraisal is vital if you want to get a commercial real estate loan and for insurance purposes, and the appraiser must be qualified, skilled, and thorough.
Here are some of the appraisal factors and how they influence the cost:
- The size of the property is one of the biggest factors, and a small commercial property takes less time and has fewer intricacies than a larger one, reducing the appraisal cost.
- The property type also influences the appraisal cost, especially if some architecture and other components require a specialist.
- Access also affects appraisal costs, like an apartment building with multiple units and tenants.
- Requesting a speedy appraisal may require several people to appraise one CRE, automatically increasing the appraisal cost.
In short, the appraisal cost on a small commercial property usually costs less than a larger one, and the longer the appraiser spends to do the appraisal, the higher the cost.
How Does An Appraiser Determine A Property’s Worth?
Appraising a CRE property is no easy task and requires a lot of time and research to determine its value; generally, the process consists of three primary methods:
Sales Comparison Approach (Market Data Approach)
The Market Data Approach, or the Sales Comparison Approach, is a popular method appraisers use to estimate a property’s value. Surrounding commercial properties like the one being appraised provide a good statistical baseline. The surrounding properties do not have to be identical, but their square foot value is an indicator that appraisers consider.
There are several other factors appraisers consider, including:
- The building’s age
- Existing leases and tenants
- The property’s structural condition
- Excess land that surrounds the property
- Parking, egress and ingress, and other features
Income Capitalization Approach
The Income Capitalization Approach requires an in-depth look at a commercial property’s current and potential income. Two almost identical buildings in the same area, one functioning as an office building and the other as a shopping center can have a big appraisal difference with the Income Capitalization Approach.
A commercial property’s current and potential yearly income influences the appraisal value and other potential business uses. Appraisers using the Income Capitalization Approach are specialized and must include risk factors like credit quality, existing leases, and the quality of tenants.
In short, the Income Capitalization Approach appraises the commercial real estate’s current income while estimating a potential income that the property can generate to establish an appraisal value.
Cost Approach
The Cost Approach is a popular method appraisers use, especially for insurance purposes. This method is all about establishing the cost to replace the building and land of the appraised commercial real estate.
This approach considers various factors, including:
- The cost of materials used to replicate the building
- The cost of labor to completely rebuild the building
- The cost to purchase identical land (lot) in the area
This approach offers insight into current markets and the potential for such a commercial property to generate cash flow. Generally, a Cost Approach evaluation takes about three days but is subject to market changes, inflation costs, and other factors.
How To Make Commercial Real Estate Appraisal More Valuable
Whether you request a commercial real estate appraisal for sales, insurance, or loan purposes, getting the highest appraisal value for the property must be the goal. Although everyone wants all commercial real estate appraisals to be measured equally, the fact is that appraisals are somewhat subjective. Each certified appraiser will have their own opinion, which affects the appraisal value.
Many factors affect the value of a commercial property, and here are three things you can do to increase the appraisal value:
Prepare Your Documents
Documents relating to the history of the building, building and site plans, leases, and current rent rolls are necessary to get an accurate appraisal. Although appraisers do their due diligence, some critical documentation that affects the value may fall through the cracks. Providing as much documentation about the commercial real estate as possible may increase the appraisal value.
Maintain Building Upkeep And Renovations
A high appraisal value is subject to the condition of the commercial real estate, and it is an important factor appraisers focus on. Maintaining a building shows that the property is looked after, prompting an appraiser to lean towards a higher appraisal value.
Remodeling a commercial property is expensive, but doing some renovations is possible with a small budget, and it is one of the best ways to increase its appraisal value.
Include Strategies For Increasing Income
Most appraisers use the Income Approach to value a commercial property, and communicating potential ways to increase the income generated can impact its appraisal value. A good example is to add the potential of a coin-operated laundry, vending machines, and parking garages to generate more revenue.
Why Is an Appraisal of Commercial Real Estate Important?
An accurate commercial real estate appraisal is essential if you want to acquire a loan, insure it for the right value, or keep up with market trends and the value of your property. Generally, a commercial real estate appraisal is used when acquiring a loan, and here are three reasons why it is important:
- An appraisal determines the current market value of a commercial property. It gives a buyer or lender a good indication of the property’s value for a loan or to sell it.
- An appraisal is a threshold for lenders to ensure the loan does not exceed the property’s value. An unbiased valuation by a third party provides confidence in a commercial real estate’s appraisal value.
- Establishing a commercial property’s potential earnings is vital when acquiring a loan or determining its market value. A third-party appraisal provides potential investors the necessary information to determine the commercial property’s worth.
Conclusion
Generally, a commercial real estate appraisal costs between $2,500 and $3,500, but some factors can increase the cost. The cost also depends on the appraisal approach, the size of the property, and current markets. It is essential to know that when it comes to CRE appraisals, the size of the property and values are subjective and can vary between different appraisers.