What’s in a Commercial Appraisal Fee?
- Wednesday, 07 January 2015 04:31
When you order a commercial appraisal, you are paying for the appraiser’s time and expertise. A typical commercial appraisal could take anywhere from 30 to 60 hours – this often varies based on the type of report that is needed.
For example, a seven-unit apartment building, reported in a summary narrative format, could likely take only a little less time as than a 14-unit building. Likewise, a 12,000 square foot industrial building will likely take about the same amount of time to complete as a 24,000 square foot industrial building. Basically, sale price and property value have little to do with the commercial appraisal fee
So what does affect commercial appraisal fees? There are essentially four factors affecting the fee of the commercial appraisal: 1) complexity of the assignment, 2) availability of data, 3) report format and 4) required turn-around time.
Complexity of the assignment
The more complex the assignment (ie. the larger the scope of the investigation) the longer it will take and the higher the fee will be.
Example a 23,000 square foot, Owner-occupied, industrial building that has continued use as-improved that is not in doubt, and also has sufficient recent transactions, both sale and rental (making data gathering quick and simple) could take approximately 35 man hours. Versus a Ski Resort. The man hours needed to drive an income approach appraisal process can take more hours and result in a higher appraisal fee.
That said, the size of the property has little to do with how complex the appraisal process will be, or become. Some of the most difficult commercial properties to appraise can be small mixed-use properties, such as a retail building with a house behind it, or office over retail. This is because there few similar property transactions, thus cash-flows and sales data sets need to be blended.
Availability of data
As inferred in the above examples, the scope of the assignment and data availability are intertwined. Take for example, a portfolio of retail hardware stores with attached lumber yards. All have low-cost steel buildings on large sites located in small market areas. Additionally, let’s say each is located many miles apart (thus there is no data crossover between the assignments). In this appraisal, we would need to analyze the market(s) for transactions of similar buildings on similarly sized parcels.
Report Format is Purpose Driven
There are essentially three formats available to the appraiser, the full-narrative, the summary narrative and the restricted report (in order of cost – highest to lowest). More often than not the user of appraisal services has little control over the required report format.
The typical lender must require a summary format, or higher due to FDIC insurance, but will usually order a narrative format. If the appraisal assignment is complex it becomes more likely that a lender will require a full narrative analysis, which can cost signifigantly more than the same commercial appraisal reported in a summary format. It is important to note that USPAP defines the level of detail that is contained in each of these formats, but that no matter the reporting format, the scope of the appraisal is to be the same.
The most economical of formats, the restricted report, is what some refer to as a letter appraisal. However, these reports can be relied upon only by the client (again, USPAP), thus, if there is potential that a third party will need to rely on the value conclusions, this format is not allowable. A great example would be the appraisal of a property for estate taxes. Because the client needs the value to determine tax owed, the IRS is passively relying on the analysis, thus the restricted format is not allowable for that purpose.
This is where the user of appraisals has the most influence on fee. We often receive calls asking for a summary appraisal of a property that is escrow with a closing date of say two weeks away. As stated earlier, the typical appraisal will take anywhere from 30 to 60 man hours, and in most cases the appraiser does not know the full scope of analysis required in the commercial appraisal until he actually sees the property. On short-order appraisals this presents a huge risk factor for the appraiser in that the fee quote is typically issued prior to seeing the subject and what data is available. As a result, the appraiser will usually factor such risk into the fee quote with considerations such as potentially having to work weekends to complete the assignment on-time. Again, per USPAP, there are no shortcuts – the analysis has to be completed to USPAP standards regardless of fee and turnaround time.
Residential Appraisals Basics
- Wednesday, 07 January 2015 03:36
A home purchase is the largest, single investment most people will ever make. Whether it’s a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
So who makes sure the value of the property is in line with the amount being paid? This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay – or a seller receive – for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser’s duty is to inspect the property being appraised to ascertain the true status of that property. The appraiser must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features – or defects – that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the neighborhoods in which they work. They understand the value of certain features to the residents of that area. They know the traffic patterns, the school zones, the busy throughways; and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ”comparable” to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property.
In the case of income producing properties – rental houses for example – the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency or ”bidding wars” that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don’t want to loan a buyer more money that the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.
What is Highest & Best Use?
- Wednesday, 07 January 2015 03:31
In order to determine market value a property must be appraised in terms of it’s highest and best use.
Highest and Best use: The reasonable probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
When a site contains improvements, the highest and best use may be determined to be different from the existing use. The determination of highest and best use takes into account the contribution of a specific use to the community and community development goals, as well as the benefits of that use to individual property owners. In appraisal practice, the concept of highest and best use represents the premise upon which value is based.
Any determination of highest and best use includes identifying the motivations of probable purchasers. The motivations are based on perceptions of benefits that accrue to property ownership. Different motivations influence the highest and best use and are significant to an appraiser’s conclusions about the highest and best uses of any parcel of real estate.
The benefits of investment properties that are not owner occupied relate to net income potential and to eventual resale or refinancing. The highest and best use decision for investment property is often influenced by the income tax and inflation hedge aspects of the existing or proposed improvements.
Determination of the type and intensity of the improvement to be placed on the investor’s land often requires an after-tax return analysis of various alternatives. Land or improved property that has resale profit as it’s principal potential benefit is purely speculative. The price such land commands in the market reflects the real motivation of the purchaser/speculator.
A use must meet four criteria as follows:
- Physically Possible
- Legally Permissible
- Financially Feasible
- Maximally Productive.
Once the highest and best use has been determined, the appraiser can then apply the appropriate approaches to value.
Real Estate Appraisal FAQs
- Wednesday, 07 January 2015 03:04
What does “appraisal” really mean?
Basically, an appraiser performs an estimation that produces an opinion of value. This opinion or estimate is arrived at through a formal process that commonly utilizes three “common approaches to value”.
What does an appraiser do?
- The cost approach (the buyer will not pay more for a property than it would cost to build an equivalent).
- The sales comparison approach (comparing a property’s characteristics with those of comparable properties that have recently sold in similar transactions).
- The income approach (similar to the methods used for financial valuation, securities analysis or bond pricing).
An appraiser offers a fair and credible opinion of market value, often in the context of a real estate exchange. Appraisers present their expert investigation in appraisal reports.
Why would I need an appraisal?
There are many reasons to purchase an appraisal, but the most common reason being real estate and mortgage transactions. A few other reasons for ordering an appraisal report include:
How is an appraisal different than a home inspection?
- To obtain a loan.
- If you would like to reduce your property tax burden.
- To build a case for a homeowner’s equity and remove insurance.
- To fight high property taxes.
- If you need to settle an estate.
- To give you an edge when purchasing real estate.
- To determine an honest property value when selling your home.
- To ensure parties are provided just compensation in eminient domain cases.
- Because a government agency such as the IRS requires it.
- It’s possible you could be involved in a lawsuit – an appraisal will help.
Home inspectors do not generate an opinion of value and are not appraisers. The point of a home inspection is to evaluate the structure of the home from bottom to attic. The average home inspector’s report includes an evaluation of the integrity of the house’s heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems, the roof, attic, and visible insulation, walls, ceilings, floors, windows and doors, the foundation, basement, and visible structure.
What is the difference between an appraisal and a comparative market analysis (CMA)?
An appraisal delivers a defensible and carefully documented opinion of value. But the biggest difference is the person creating the report. A CMA is created by a real estate agent who may or may not have a true grasp of the market or valuation concepts
What can I expect to see in my appraisal report?
The main purpose of an appraisal report is to let the reader know the value of the real estate in question, and depending on the scope of the report, you’ll usually see the following:
Once the appraisal has been delivered, how can I have assurance that the value indicated is trustworthy?
- The client and whose purposes the appraisal is to serve.
- The intended use of the appraisal.
- The reason for the assignment.
- Precisely what “value” attribute is being reported and what that value means.
- The effective date of the appraisal.
- Relevant property attributes, including: location, physical characteristics, legal attributes, economic factors, the real property interest valued, and non-real estate items included in the valuation, such as personal property, permanent equipment installations and even intangible considerations.
- All known easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, and the like.
- Division of interest, such as fractional interest, physical segment and partial holding.
- The scope of work considered to complete the appraisal.
- In the documentation of an appraisal, each appraiser must make sure of the following:
- That the information analysis contained in the appraisal was appropriate.
- That critical errors of omission or commission were not committed individually or collectively.
- That appraisal services were done in a careful and cognizant manner.
- The final appraisal report was clear, legitimate and defensible.
To become a state licensed appraiser, there are both education and job experience requirements must be logged – all with the objective of being able to render unbiased value opinions. Likewise, appraisers must obey a stringent industry code of ethics and respect national standards of practice for real estate appraisal. The tenets for developing an appraisal and reporting its results are insured by enforcement of the Uniform Standards of Professional Appraisal Practice (USPAP).
Regulations regarding licensing and certification of Real Estate Appraisers are different from state to state. However, licensing and certification typically translates to many hours of classroom study, tests and practical experience. Once an appraiser is licensed, he or she must then engage in continuing education courses so that the license doesn’t expire.
How do I get ready for the appraiser?
We begin with an inspection of the property. During an inspection, the appraiser will come to your home and measure it, determine the layout, confirm all aspects of the home’s general condition, and take several photos of your house for inclusion in the report.
Before the inspection:
- Be sure the appraiser has easy access to the exterior of the house (gates aren’t locked, etc).
- Trim any shrubs and relocate any items that would make it difficult to measure the structure.
- Make sure the appraiser can get to items like furnaces and water heaters.
You can make things go faster and improve the quality of the appraisal report by having the following things on hand:
- Records on the latest purchase of the property in the last three years.
- Title policy that describes encroachments or easements.
- Any inspection reports, or other recent reports for termites, EIFS (synthetic stucco) wall systems, septic systems and your well.
- Locate copies of the current listing agreement, broker’s data sheet and, if the sale is “pending”, the purchase agreement.
- Most recent real estate tax bill and or legal description of the property.
- Wednesday, 07 January 2015 00:40
Have you heard an appraiser use any of these terms? Did you just hear one of our appraisers use it and you came here to figure out what it meant? We don’t mean to speak a foreign language, but any profession has its jargon. What res ipsa loquitur is to a lawyer and triple witching is to day traders, external obsolescence is to appraisers. Here are some examples of common appraiser jargon and their meanings:
Adjustment. When comparable properties have been identified, the appraiser adjusts the value of the subject property according to differences in living area, acreage, frontage, amenities and the like. This is where the professional expertise of an appraiser is most valuable.
Chattel. Personal property that may be on the subject property but which does not figure into the opinion of value in the appraisal report.
Comparable or “comp”. Properties like the subject property nearby which have sold recently, used as a basis to determine the fair market value of the subject property. The Uniform Standards of Professional Appraisal Practice (USPAP) establish clear guidelines for comparable selection.
Drive-by. An appraisal that is limited to examination of comparable sales and a determination that the property is actually there and has no obvious defects or damage visible from the outside. Fannie Mae’s form for this type of appraisal is its 2055, so you may hear a drive-by referred to as a “2055.”
Fair market value. The appraiser’s opinion of value as written in his or her appraisal report should reflect the fair market value of the property — what a willing seller would pay a willing buyer in an arm’s-length transaction.
GLA. “Gross Living Area,” the sum of all above grade floor space, including stairways and closet space. GLA is often determined using exterior wall measurements.
Latent defects. A defect on the property that is not readily apparent but which impact the fair market value. Structural damage or termite infestation might be examples.
MLS. A Multiple Listing Service is a proprietary listing of all properties on the market in a given area and their listing prices, as well as a record of all recent closed sales and their sales prices. Created by and used primary by real estate agents, many appraisers pay for access to these databases to aid in comparable selection and adjustment research.
Obsolescence. The value of assets diminishes as their capabilities degrade or more desirable alternatives are developed. Functional obsolescence is the presence or absence of a feature which renders the property undesirable. Obsolescence can also occur because the surrounding area changes, making a feature of the property less desirable.
Subject. Short for the property being appraised — the “subject property.”
Useful life. The time during which a property can provide benefits to its owner.
URAR. Short for Uniform Residential Appraisal Report, Fannie Mae form 1004, it is the form most lenders require if they need a full appraisal (that is, with walk-through inspection).
USPAP. Short for Uniform Standards of Professional Appraisal Practice, USPAP promotes standards and professionalism in appraisal practice, and is often enacted into law in a state. It is promulgated by the Appraisal Foundation, a non-governmental entity chartered by Congress to, among other things, maintain appraisal standards.
Walk-through. An inspection that includes a visit to each part of the interior of the house used in estimating value.