It’s never a good idea to skip a CRE appraisal even when you want to close a red-hot deal right away. This process is there for a reason: it can save you from overpaying for a property with deferred maintenance or hidden liabilities.
Determining a CRE asset’s value isn’t as straightforward as pricing a house. CRE values tend to sway with factors like market trends, as well as the property’s income potential and overall condition. An appraisal cuts through the noise to give stakeholders a professional and unbiased assessment.
Are you planning to buy a commercial building? Having a professional appraisal strengthens your negotiating position, allowing you to push back on an inflated asking price and back up your offer with solid data.
Are you planning to take our CRE financing? Lenders won’t approve a CRE loan without an appraisal. They need to confirm that the property’s value supports the amount they’re lending. They know that appraisals reveal risks and opportunities that may not be obvious at first glance — and you, as a CRE investor, can also use these insights to fine-tune your investment strategy and avoid surprises.
How CRE Appraisals Differ from Residential Property Appraisals
Commercial appraisals involve a whole different level of complexity. Unlike homes, commercial properties come in many forms, and each type has unique factors that influence its value.
Residential appraisals focus on comparable sales in the area. In contrast, commercial appraisals emphasize the property’s ability to generate income. It looks at tenant stability, lease terms, market demand, and other related factors.
A residential appraisal might take just a few days, but commercial appraisals usually take a few weeks to complete because of the complexity involved. They also cost more due to the detailed analysis required.
Notably, commercial appraisers rely on proprietary databases and market reports that aren’t available to the general public. Their reports aren’t quick summaries — they can run dozens and sometimes over a hundred pages long.
Unlike residential appraisals, commercial appraisals analyze a property’s highest and best use, which involves evaluating whether the property is being used in the most profitable way or if there’s a better use that could increase its value. This is why commercial appraisers need more specialized training to understand complex financial concepts and learn how to analyze business operations.
When Would You Need A Commercial Real Estate Appraisal?
Appraisals are critical at various points in a CRE property’s lifecycle. Knowing when to get one can help you avoid costly mistakes and maximize your investment.
- Mortgage Lending or Refinancing – If you’re applying for financing or refinancing an existing loan, expect the lender to request an appraisal before they approve it.
- Insurance Coverage- Knowing your property’s value ensures you’re paying for the coverage you actually need so that you’re not over- or under-insured.
- Buying or Selling – Appraisals help buyers avoid overpaying and ensure sellers set a fair asking price.
- Estate Planning and Probate – An appraisal ensures that the property’s worth is accurately calculated when dividing assets or settling an estate.
- Partnership Buyouts or Dissolutions – If you’re part of a partnership that’s ending, an appraisal makes sure the property is fairly valued and that both parties receive an equitable share.
- Tax Assessments – Do you think your property tax bill is too high? You can use a professional appraisal to challenge it.
Even when not required, an appraisal gives you a clearer picture of what you’re investing in and can prevent you from paying more than the property is worth.
How Long Does A CRE Appraisal Take?
Commercial appraisals can take between two and four weeks to complete. If you have time constraints, communicate them with the appraiser right at the start of the process to manage expectations and avoid delays.
What Data Do CRE Appraisers Gather?
Property-Specific Details – Appraisers look at factors like the property’s size, condition, lease terms, and other details that can help them compare it to similar properties in the market.
Market and Location Data – They also analyze the local economy and zoning regulations as well as the local demographics to understand how the area impacts the property’s potential.
Comparable Properties – Recent sales of similar properties provide context for how your property fits into the current market and help validate the appraiser’s valuation.
Industry and Sector Trends – Market conditions and trends within specific sectors (like retail or industrial) can affect the property’s value, so appraisers take these factors into account to give a more accurate estimate.
Appraisal Methodologies
Appraisers use three main approaches to determine a property’s value:
- Sales Comparison Approach
This method looks at the sale prices of similar CRE properties in the area and is commonly used for commercial properties where there are frequent sales to draw comparisons from, such as office buildings, retail spaces, or multi-family housing in active markets. It’s often less effective for unique or special-use properties that don’t have clear comparables.
- Income Capitalization Approach
This CRE appraisal method focuses on the property’s potential to generate income. There are two ways to apply it:
- Direct Capitalization – In this method, the appraiser divides the property’s NOI by a capitalization rate to get a snapshot of the property’s value based on its expected return.
- Discounted Cash Flow – This projects the property’s future income and expenses over several years and is useful for properties with long-term leases or fluctuating cash flows. CRE appraisers know how to analyze a property’s cap rate, which reflects its potential return and helps investors gauge whether it’s a worthwhile addition to their portfolio.
- Cost Approach The cost approach estimates how much it would cost to replace the property from the ground up, and is often used for new construction or unique CRE properties that don’t fit neatly into the sales or income approaches. The appraiser calculates the cost to build a similar structure and then adjusts for depreciation. Do note that this method focuses on replacement costs rather than what buyers are willing to pay, which can result in a valuation that’s different from market expectations.
Do note that appraisers rarely rely on just one approach. They may combine these methods to ensure that their final valuation is as accurate and well-rounded as possible.
Red Flags to Watch for in Commercial Property Appraisal Reports
Professional appraisers are legally bound to exercise due diligence and adhere to professional standards of practice. But sometimes, assumptions or mistakes can slip in and affect the final valuation, so it’s important to carefully review the report when you receive it and speak up if something doesn’t seem right. Look for possible mistakes such as:
- Outdated Data – Did the appraiser use the most recent data available?
CRE markets move fast so an appraisal needs to reflect current conditions. If the report references sales or trends from months ago, it could already be out of date.
- Unexplained Adjustments – Appraisers who use the sales comparison approach adjust property values to account for differences between the subject property and comparable sales. These adjustments should be reasonable and well-supported. Any large, unexplained adjustments could mean the appraiser stretched to make the numbers fit.
- Incompatible Comps – Are the comps relevant and reflect similar market conditions? A retail property compared to office buildings, for example, won’t give you a fair estimate. If the appraiser uses comparable properties that don’t match your property in size, location, or use, it can throw off the valuation.
- Cash Flow Projections That Are Too High or Too Low – If the CRE appraiser’s cash flow projections seem overly optimistic, they might inflate the property’s value.
- Conflicting Highest And Best Use Analysis – If the appraiser’s recommendation doesn’t match what’s practical or profitable, ask them why. Review their analysis to see if it makes sense for the property and ask for a clearer justification if necessary.
- Using Just One Approach – Does the report lean too heavily on just a single CRE appraisal methodology? This could suggest that there are missing insights.
- Computation Errors – Be sure to check the calculations (especially if the report uses the income approach). Small math mistakes can cause big discrepancies, so it’s worth double-checking the numbers.
The Future of CRE Appraisals
Instead of relying on traditional ground-level inspections, CRE appraisers now use drones to capture aerial images and create detailed 3D models of large properties and sites with tricky terrain. They are also turning to virtual and augmented reality to inspect CRE properties remotely and even conduct virtual walkthroughs without setting foot on-site. Such tools let them visualize renovations and improvements to provide more accurate “as-completed” valuations.
And because smart buildings are packed with sensors that track everything from energy use to maintenance needs, some appraisers now pull this data to better understand a property’s efficiency and future costs. They no longer have to make assumptions about wear-and-tear or utility expenses because they can see the numbers in real time.
For you as a CRE investor, this means fewer surprises — you’ll know upfront if a building has underlying issues that could lead to higher expenses or if there’s untapped potential to increase value. Armed with this information, you can make smarter offers and negotiate better terms, as well as plan improvements that boost your returns.
