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National Mortgage Professional
Aug 14, 2006

The Commercial Corner: Commercial appraisals: What to expectMike Boggianocommercial loans, appraisals The Mortgage Press is pleased to present "The Commercial Corner," a monthly column by Mike Boggiano of Silver Hill Financial LLC dedicated to answering your questions about the commercial mortgage marketplace. If you have a question that you would like answered in a future installment of "The Commercial Corner," please e-mail commercialcorner@mortgagepress.com. The appraisal is one of the most misunderstood differences between residential and commercial loans and, therefore, a familiar topic for frequently asked questions by brokers and borrowers. The following is an explanation of the most common differences, which is helpful for brokers who are just crossing over into commercial field, as well as those currently serving customers in this line of business. Brokers are wise to educate borrowers up front about commercial appraisals so that they know what to expect. Q: Why does a commercial appraisal take longer and cost more than a residential one? A: The simple answer is because of the real estate. Typically, residential appraisals take into account just two approaches when determining the value of a property: direct sales comparison and replacement cost. Commercial appraisals must consider three approaches: direct sales comparison, cost replacement and the net operating income approach. In addition to basic property-driven differences, there are more appraisers certified for residential appraisals than commercial ones. Also, commercial lenders often require their appraisers to be specialists or posses Certified General Appraiser designations. The residential appraiser usually has much more homogenous data available in a relatively small area, which makes for easier (and quicker) comparisons. The differences among homes are apparent (e.g., three bedrooms versus four, two baths versus three, etc.), but a house is a house. In addition, there is widespread standardization of residential appraisals and the underwriting methods used to review them. By contrast, a commercial appraiser has to locate similar properties (retail, office, warehouse, multi-family, etc.) with comparable data. While multi-family properties are fairly similar to residential, virtually every other property type has a range of variance, even within one category. Comparisons are, therefore, more complex, take more time and are noticeably more expensive than a standard residential appraisal. This is especially true in rural areas, where market and sales comparisons are not readily available. The commercial appraiser also must verify and analyze a considerable amount of information, including rents, financing and expenses from participants in the sale of the property, all of which add to the complexity and cost. Each broker should look for a lender that requires primarily limited appraisals (especially in the small-balance commercial field), begins an appraisal early in the loan transaction or manages the process. Some lenders may even solicit bids on your behalf, which helps to keep cost down while ensuring that you get a qualified, dependable professional. Q: How is a commercial appraisal conducted? A: The commercial appraiser inspects a property and not only compares it to similar properties in the market that have sold recently, but also analyzes the rental income and operating expenses from the property and compares them to the rent levels and expense loads for other properties in the immediate area. From this analysis, a net operating income is derived, which needs to be capitalized into value. The capitalization rate is determined by the market sales and represents the investors' or purchasers' perception of risk. Only after all of this data are collected and analyzed can commercial appraisers reconcile to a value estimate. Q: As a broker, what is my role in the commercial appraisal process? A: Perhaps the most effective role you can play is that of a trusted advisor to your client. Pass along your knowledge of the commercial appraisal process and how it differs from the residential process. Give your borrower an idea of what to expect and an understanding of the complexity that affects the timeline and cost of the appraisal. You can also ensure that reasonable access to the commercial property is available to the appraiser. In addition, all relative documents, such as the rent roll, operating statements and purchase contracts, should be available to the appraiser early in the process to avoid any delays. If you've partnered with a lender that handles the appraisal process for you, maintaining communication with your borrower is your primary responsibility, and that should be easy. Q: Why can't I use existing appraisals? A: Most commercial lenders prefer to be in control of ordering appraisals so that they are comfortable with the selected appraisers based on their past records of working with the lenders. This also helps to prevent any potential conflicts of interest between appraisers and borrowers or brokers. Plus, a commercial appraiser must have a State Certified General License and sign a competency clause indicating that he has knowledge and experience with a particular type of property in a given market area. Mike Boggiano is senior vice president, national sales manager for Silver Hill Financial LLC. He may be reached by phone at (877) 676-1562 or e-mail mikeb@silverhillfinancial.com.
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