But what if it’s more than that?
Most people’s only experience with an appraiser is when they buy a home. The role of a commercial real estate appraiser may not be as well-known, but they have many similarities. What does a commercial real estate appraiser do? Commercial appraisers estimate the value of different types of commercial properties including:
Estimating the value of different types of commercial properties takes different levels of expertise. No matter their level of expertise, appraisers always complete a valuation using one of three approaches: The cost approach, the sales comparison approach, or the income approach.
The cost approach estimates value based on the cost of building a property. This approach is based on the idea that people associate cost with value. In other words, you would not build a property if it was worth less than the construction cost. First, appraisers estimate the cost to construct the property (known as the replacement cost). Next, they deduct for physical deterioration, functional issues, and external market factors.
The sales comparison approach is the most straightforward. In it, appraisers compare the sales of similar properties to the property being appraised. When enough data is available, this is often the preferred approach to estimating value.
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 because of the expected income stream. Appraisers will estimate the net operating income of a property by reviewing multiple sources. These sources include:
The most common income approach is the direct capitalization method. Here, appraisers value the estimate by capitalizing an income stream, or 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.
A commercial real estate appraiser uses these tools to estimate value and 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, 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 get a good grasp of its quality and condition. Then, one or more of the valuation approaches described above are used to estimate value.
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 are:
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. Because of this, 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 and allows for great networking opportunities. One of many other benefits of the Appraisal Institute is that it offers high-quality education.
The commercial appraising profession allows you to be on the leading edge of what is happening in your local market and provides a lot of variety. Most commercial real estate 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. So, while three years may sound like a long time, I can speak from experience that time goes by quickly.
About the Author
Matt Speer, MAI, is a partner at the firm Keller, Craig & Associates.
