What Does a Commercial Real Estate Appraiser Do?

So what does a commercial real estate appraiser do anyway?

When people think of appraisers they normally think of residential appraising.  It’s natural because most people’s only experience with an appraiser is when they buy a home.  The role of commercial real estate appraiser is not as well-known as it is for appraising residential properties, but they are built on the same principles. In the broadest terms, commercial appraisers estimate the value of different types of commercial properties including land, office buildings, industrial buildings, shopping centers, and hotels. Valuation of different types of commercial properties takes different levels of expertise.  However, appraisers always complete a valuation using one of three types of analysis: the cost approach, the sales comparison approach, and the income approach.

The Cost Approach

The cost approach is estimating value based on the cost to build a property. This approach is based on the idea that market participants associate cost with value. In other words, a knowledgeable person would not build a property if it was worth less than the cost to construct. In practice, appraisers estimate the cost to construct the property (known as the replacement cost). Next, they make deductions for physical deterioration, functional issues, and external market factors.

The Sales Comparison Approach

The sales comparison approach is the most straightforward approach. In it, appraisers compare the sales of similar properties to the property that is being appraised. When data is available, this is often the preferred approach to estimate value.

The Income Approach

The income approach is based on the income potential of the property. It is based on the theory that an investor will purchase a property based on the expected income stream. In practice, appraisers estimate the net operating income of a property by reviewing multiple sources such as historical operating data, comparable properties, and other market information. The most common method of performing an income approach is the direct capitalization method. Here, they value the estimate by capitalizing an income stream, or in other words, dividing the net operating income by a capitalization rate. A capitalization rate is determined by dividing the net operating income by the sale price of a property.

Why Commercial Appraisals are Requested

A commercial real estate appraiser uses these tools to estimate value to solve valuation issues for various needs. The most well-known need for commercial appraisals is for new loans. However, there are many other situations in which an appraisal is required, such as real estate tax purposes, for dividing assets in divorce proceedings, and for eminent domain work.

The process of completing an appraisal begins with defining the scope of the assignment, and deciding which tools need to be used to solve the valuation problem. Next, the appraiser generally inspects the property, to have a good grasp of the quality and condition of the property. One or more of the valuation approaches described above are then used to estimate value.

How to Become a Commercial Real Estate Appraiser

More information is available at the Appraisal Foundation.    The Appraisal Foundation sets the minimum requirements for licensing, but check requirements in your state. The minimum standards set by the Appraisal Foundation include a bachelor’s degree, 300 hours of required coursework, and 3,000 hours of work experience supervised by a general certified appraiser. Generally, the process to become state certified takes about three years.

Often, the most challenging part of getting into the field is finding a certified appraiser willing to train you. Getting involved in the Appraisal Institute is a great way to find that mentor. The Appraisal Institute is the world’s largest professional association of appraisers. It has chapters in every state, which allows for great networking opportunities. One of many other benefits of the Appraisal Institute is that they offer high-quality education.

This profession allows you to be on the leading edge of what is going on in your local market and provides a lot of variety. Most commercial appraisers get the opportunity to appraise different property types, so each day is different. You could be appraising vacant land one week, an office building next week, and a hotel the week after that.