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
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
Q: As a broker, what is my role in the commercial
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 firstname.lastname@example.org.