Appraisals are a necessary part of anyone looking to buy or sell a property, and commercial real estate appraisals differ vastly from residential appraisals.
The biggest difference is that commercial real estate appraisals are more often subjective. There are three main approaches to commercial property valuations: the income approach, the sales comparison approach, and the gross rent multiplier approach.
Commercial real estate buildings tend to be more unique, so it is harder to compare them to other similar properties to gauge a price. This means that appraisers often have to use their best judgment in arriving at a figure, and the comparison approach is less reliable.
As well, when it comes to the income approach, appraisers are required to do a certain amount of guesswork in putting together numbers for potential income from the business. Again, the income estimates will be based on the income rates of similar businesses, but these are not a guarantee.
While buyers may appreciate a low property appraisal because it could save them some money, sellers will not be so pleased with the prospect of selling for less. So what are the causes of low appraisals and what can property owners do about it?
Beyond major structural issues and other reasons for condemning the building, there are some unexpected reasons for a low appraisal that can be easily turned around. First, let’s look at the reasons for low appraisals.
Poor Curb Appeal
What causes low property appraisals? There are quite a few factors that can diminish the value of a property. Value detractors start at the very first sight; the outer appearance.
A building that is in obvious and dire need of a cosmetic upgrade will immediately lose value. Whether the paint is chipping, the lot is full of garbage, or it is simply outdated, a good facelift can do wonders for the appraisal.
Market Conditions
When coming up with an appraisal, market conditions are a major factor. Market conditions change rapidly, and they influence prices by affecting comparable properties. When comps go for more or less, then your property will follow suit.
If markets are unfavorable, then there is not a lot that appraisers and homeowners can do. Sometimes it is best to wait for the clouds to clear.
No Recent Comps
Similarly, if there aren’t any recent comparable properties, then appraisers will have to look at dated comparisons and then factor in present-day market conditions. This requires some guesswork too.
Appraisers and homeowners in this situation can redouble their efforts by looking farther afield, whether in neighboring counties or across state lines.
Untenable Expectations
Finally, sometimes the case is simply that buyers have an overly inflated sense of what their property is worth. This is especially true in the case of people who are preparing to go to the market during a downslope in pricing.
Appraisers work with property owners to manage their expectations because, ultimately, the appraisal must be fair and accurate.
How Property Owners can Respond to Appraisals
Lack of recent sales on comparable properties, unrealistic expectations, market conditions, and poor presentation can all lead to undesirable appraisals.
Property owners have three choices when they receive an appraisal they are unhappy with:
- They can take their property off the market and wait for more favorable conditions.
- They can try to pay the difference to make up for any financing losses.
- They can negotiate other terms of the sale with the potential buyer if the appraisal comes in under the expected value.
Either way, it is helpful for clients to be able to receive their appraisal reports in a timely and accessible manner. Appraisers benefit from software that produces state-of-the-industry reports along with a platform that provides the option of tracking and organizing assignments. Check out Valcre’s end-to-end appraisal software solution.