While commercial appraisals are an integral part of estimating the market value of a property, the appraisal process itself can be quite overwhelming — especially for those who haven’t gone through it before.
According to the Appraisal Institute, commercial appraisals may be required for any number of reasons, including:
- to facilitate the transfer of ownership of real property
- to help prospective sellers determine acceptable selling prices or prospective buyers decide on offering prices
- to establish a basis for the exchange or reorganization of real property or for merging the ownership of multiple properties.
Reasons can also relate to financing and credit, legal and tax issues, or investment counseling and decision making.
Regardless of the reasons and details, the procedures involved in the commercial appraisal process remain more or less the same. Here, we’ve broken down the process into 7 easy-to-follow steps, so you can feel informed and confident every step of the way.
7 Steps of the Commercial Appraisal Process
1. Identify the problem.
The appraiser first determines the client, intended use, type of value, and relevant characteristics of the property.
2. Determine the scope of work.
Next, the amount and type of information to be researched and the analyses to be applied in an assignment is outlined in the scope of work.
3. Collect the data
During this step, data on the market area and comparable properties is gathered to understand the economic environment and other variables that cause property values to fluctuate.
4. Analyze the data.
The data analysis typically takes into account the scarcity, desire, utility, and effective purchasing power of comparable properties to help the appraiser formulate calculations that indicate the value of the subject property.
5. Estimate the land value (if applicable).
Sales of similar land parcels are analyzed in comparison to the land being appraised in order to form an opinion on the value of the land. This step is necessary when developing either the cost approach or sales comparison approach.
6. Form an opinion of value.
The appraiser takes into account the data and analysis, as well as their experience and expertise, to form a final opinion of value. They reconcile and summarize their approaches to value. The appraisal may have various combinations of methodologies utilized (i.e. cost approach, sales comparison approach, and/or income approach).
7. Prepare an appraisal report.
Finally, the appraiser generates a report in one of the formats defined by The Uniform Standards of Professional Appraisal Practice. Those written formats include Appraisal Reports and Restricted Appraisal Reports, each with their own reporting requirements and chosen based on their suitability for the intended use and intended user of the appraisal.