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Commercial Real Estate Appraisals: What You Need to Know

Stay informed and be prepared to get the most out of the appraisal process

If you’re looking at buying, selling, or signing a major lease on a commercial property, you likely want to get a property appraisal first. But before you do, it pays to understand a bit about how appraisals work, an appraiser’s responsibilities, and which type of appraisal might be best for your unique situation.

Providing accurate information is key

It’s important to realize that appraisers are publicly-licensed officials and that the actual inspection of a property is only a small part of the entire appraisal. Much of the process will involve looking through public records and other data to determine information like historical property prices and the suitability of a piece of land for future business use.

Therefore, any information you provide the appraiser will most likely be checked and verified multiple times for accuracy – so any misleading or inaccurate information will only slow down the appraisal process and reduce the appraiser’s trust in any further information that you provide.

Prepare in advance by compiling any documentation or paperwork

Whether you’re looking to get your own property appraised in order to sell it or lease it, or someone else is looking to buy or lease your property and wants it to be appraised, you’ll likely need a good amount of documentation for the appraiser. This might include a property tax bill, income statements, drawings or plans of the property, and a variety of other information.

Get the right type of appraisal for your situation

There are three types of reports that you can commission an appraiser to create: a restricted use report, a summary report, and a self-contained report. A restricted use report is the shortest and least expensive, but it can only be used by the client, so it’s of somewhat limited use if you are trying to sell a property. A summary report is slightly longer and costlier, but it can be used by anyone, and it is often the best option for someone trying to sell a property. A self-contained report is the longest and priciest, as it contains detailed analysis of the property – but it’s also rarely commissioned, as a summary report will usually provide enough information for most business purposes.

Tell the appraiser why you want the property appraised

If you’re hiring an appraiser, it’s a good idea to tell them who the report is intended for, and why you want to use it before you begin the process. Commissioning the wrong report could lead to a significant waste of time and money, so it’s best to make sure you’re going in the right direction from the start.

More specifically, you also want to communicate with the appraiser what exact financial estimates or values you would like to get from the property appraisal process. For example, if you are interested in buying a property to start or relocate a business such as a store, you want to know the full value of the building and the property, otherwise known as the “fee simple interest.”

Comparatively, if you are considering signing an expensive lease for a business and you want to know what a fair rent price is, you’re more likely to want to know a property’s “leasehold interest.” These are just a few examples of the essential values an appraiser can calculate and another reason why full and open communication is the best way to get the most out of the commercial property appraisal process.

If you want to learn more about the property appraisal process or about how to effectively buy, sell, lease, or manage property in an ever-changing market, contact the commercial real estate experts at Morris Southeast Group for a free consultation. Our team can be reached at 954.474.1776, call Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com.

The Top Commercial Real Estate Due Diligence Mistakes

Avoid these due diligence don’ts while navigating commercial real estate investment

When it comes to securing a commercial real estate deal, the due diligence process sometimes takes a backseat to seemingly more important factors, such as raising money and negotiating the deal. Because of the focus on the other aspects of the deal, investors can overlook essential research and end up making expensive mistakes. Here are some of the common issues to watch out for when conducting due diligence on a commercial property.

Mistake #1: Improperly valuing the property

You need to do your research and be conservative when you’re underwriting a deal. This includes checking for sales comps and other available properties on the market. Contact active commercial brokers in the area and request an assessment of local property values and sold and listed comparables. Based on that information, adjust your valuation to get an accurate assessment of the property.

Mistake #2: Trusting sellers to disclose any problems

In a perfect world, sellers would willingly disclose any problems with the property to prospective buyers upfront. Unfortunately, they are not typically eager to reveal these issues, which is why it is so important for you to conduct a thorough inspection yourself.

Even if the seller has inspections and reports on-hand, it is always better to have a third-party inspector review the property on your account so you can ask any specific questions and get professional answers. And if problems are discovered before closing, you will likely be able to negotiate a reduced price.

Mistake #3: Misunderstanding a lender’s underwriting requirements

Before the due diligence process even begins, you should make sure you have a discussion with your lenders about the loan amount they will put up on your property. Lenders have been very conservative in recent years and consider several different variables you might not factor in, including intended use and environmental issues. Before moving forward with your investment, you should be sure you understand exactly what your lender is willing to provide and why.

Mistake #4: Assuming the property is code compliant

In addition to having someone inspect your property for unknown problems and damage, you should also have a contractor inspect the facility to ensure it meets all ADA and building codes. The last situation you want to end up in is finding out the property is not code compliant when a city inspector comes to review your newly-renovated or purchased space.

Mistake #5: Assuming your lender will accept any third-party reports

Before you hire a third-party vendor to conduct an inspection for damages or code compliance, make sure your lender approves of them. This includes the Property Condition Assessment, Environmental Report, or any other specialized report you might have done. As a rule of thumb, if you’re not sure if your lender needs to approve of someone, ask anyway.

Although it’s sometimes overlooked, thorough due diligence is one of the most important tenets of a successful commercial real estate deal. In order to ensure you’ve covered all your bases, it’s important to work with a team of experienced commercial real estate professionals who can help you navigate the process and avoid these common mistakes.

Need help with your next commercial real estate investment? Morris Southeast Group is here to help. With over 25 years of experience in South Florida, we are proud to represent everyone from property owners to investors to ensure their commercial real estate needs are met effectively and efficiently. Contact our team today at 954.474.1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com for a free consultation.

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