Small business owners have to juggle a lot of knowledge. There are many benefits to running your own business, prime among them getting to be your own boss. But this freedom and focus have to be earned with quite a bit of work and research.
One of the many things business owners need to have a handle on is commercial real estate appraisal. Many business owners are surprised to find that the appraisal process for a commercial building is much different than that of a residential one.
A commercial appraisal is a lengthier and often more subjective process that involves a large number of factors. If you’re a small business owner, it’s essential that you have a grasp on how the process works.
Read on and we’ll walk you through everything you need to know.
What Is a Commercial Appraisal?
A refresher on the basics might be helpful. If you don’t know, a commercial real estate appraisal is an assessment of the perceived value of a piece of commercial property.
Such property could include anything from an apartment building to a brick-and-mortar storefront to a piece of vacant land.
If you’re planning on buying or selling a piece of property, a professional appraisal is probably required as part of the sale. The information gleaned in an appraisal can help price and clarify the value of a piece of property.
There are many reputable commercial appraisers out there on the market. You can visit this site to learn more about the services such business provides.
Sometimes a commercial appraisal is also referred to as a valuation. These are terms that can be used interchangeably and don’t represent two separate processes.
Honesty Is the Best Policy
First, it’s important that you go into the appraisal process with the right mindset. It can be tempting to inflate different parts of your property to get a better valuation.
But professional appraisers have seen all the tricks and can see through any type of dishonesty. They will work hard to verify or disprove each and every one of the claims you try to make about your property.
Professional appraisers are sometimes called upon to defend their valuations in a court of law. So they are diligent about ensuring they have proof to back up their claims. So while it can be tempting to try and push some angles of your property a little further, it’s better to just be honest in the long run.
It’ll save you time.
On the same note, don’t make the mistake of withholding any information from an appraiser. You will be asked to provide a large amount of information, including income statements and property taxes.
If you do not provide or alter these documents in any way, you will lose all ground on which to dispute an appraiser’s final claim down the line. It’s best to be upfront with everything and dispute the final valuation if you disagree with the conclusion.
Appraisal Is More Than an Inspection
When business owners picture the appraisal process in their head, they’re likely thinking of the physical inspection. That’s the part of the process where the appraiser comes to visit the property and look around.
This process can take anywhere from an hour to several depending on the specifics of the property. Business owners prepare rigorously for this inspection, but the truth is it’s just a small part of the overall appraisal.
Zoning records, public ownership, building costs, neighborhood demographics, and a wealth of other information have just as much impact on valuation as the investigation.
This is why a commercial appraisal can take such a long time to perform. While an inspection can be done over the course of an afternoon, the research needed to properly appraise a building can take weeks or even months.
Different Approaches To Appraisal
Determining the value of a property is a difficult process. There is more than one way to reach a conclusion. Most appraisers will work in one of three different methods: the cost approach, the market approach, or the income capitalization approach.
The cost approach essentially equates property value with what the cost of building a replica building would be. Because of the effects of depreciation and other factors, this method is more often used on brand new properties.
The market approach uses sales of similar properties to reach a valuation. It compares features in similar buildings and the costs associated with those features. An eventual valuation is made based off comparisons to existing sales numbers.
Income capitalization takes into account how much money a building or piece of property might generate over its lifetime. Businesses, apartment buildings, and high income related properties are most commonly evaluated using this method.
The type of method used depends on the appraiser and the type of property being evaluated. An appraiser will attempt to use the method that feels most appropriate given the property at hand.
Sometimes, an appraiser will attempt to find an evaluation through more than one method. But only the result of one of the methods is considered the proper valuation at the end of the working process.
Understanding Commercial Appraisal
As a business owner, your commercial appraisal will be key in determining the value of your property. It’s an essential number to have that will impact much of your future business decisions. As such, it’s important to understand how that number is reached, as outlined above.
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