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HUD settles case against Prudential for RESPA violations

Dec 26, 2005

Commercial vs. residential appraisalsMike BoggianoCommercial appraisals,residential 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 [email protected]. Q: How would you describe the differences between the residential and commercial appraisal processes? A: A residential appraiser inspects a property and compares the home to other residential properties in the same or similar markets. Adjustments are made to the appraisal, based on the distinctions between the residential property and other comparable houses, so that a final value can be reconciled. 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 from the property and compares it to the rent levels for other properties in the immediate area. The operating expenses for the property also need to be analyzed and compared to the market. 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' perceptions of risk. Only after all of this data is collected and analyzed can a commercial appraiser reconcile a value estimate. Q: Why do commercial appraisals cost so much more than residential appraisals? A: As mentioned above, typically, residential appraisals take into account just two factors when determining the value of a property--a direct sales comparison and cost. Commercial appraisals must consider three factors--a direct sales comparison, cost and the net operating income. In addition, usually, residential properties are situated in neighborhoods that are fairly homogenous, giving the appraiser more data in a concentrated area for comparison. There also is a larger market of potential buyers in most residential areas. This results in greater turnover among properties, which gives the residential appraiser more relative data. Finally, there are many more appraisers who are certified for residential appraisal than for commercial appraisal. Q: A residential appraisal can be completed in a few days. Why does it take a few weeks to complete a commercial appraisal? A: Many of the reasons stated above can help to explain the extra time involved in completing a commercial appraisal. The residential appraiser usually has much more homogenous data available in a relatively small neighborhood. Often, a commercial appraiser has to locate similar properties (retail, office, warehouse, multi-family, etc.) with comparable data. The appraiser for a commercial property also must verify and analyze a considerable amount of information, including rents, financing and expenses, from participants in the sale of the property. Q: Will commercial lenders accept existing appraisals? A: Most commercial lenders will not accept existing appraisals. They prefer to be in charge of the appraisal-ordering process, so that they have a comfort level with the chosen appraiser based on his past record of work with the lender. However, any perceived relationship that could suggest a conflict of interest between a borrower or broker and the appraiser must be avoided. Q: How do you choose a commercial appraiser? A: Most lenders will handle the selection of an appraiser. A commercial appraiser must have a state-certified general license and sign a competency clause, indicating that they have knowledge and experience with a particular type of property in a given market area. Q: What are the brokers' or loan officers' responsibilities within the commercial appraisal process? A: Brokers and loan officers should make sure 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, so as not to cause delay. Finally, the loan officer should talk the borrower through the appraisal process, so that she fully understands the procedures and the costs involved. Mike Boggiano is senior vice president, national sales manager for Silver Hill Financial LLC. He may be reached at (877) 676-1562 or e-mail [email protected].
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