Commercial real estate appraisal is a combination of art and science. Knowledgeable appraisers gather and analyze data prior to making informed decisions about real estate value. The appraisal profession has developed a series of well-established analytical techniques; the cost approach, income approach and sales comparison approach. The most appropriate approaches depend upon the characteristics of the subject property.

The cost approach is considered most applicable for commercial real estate appraisals for relatively new properties and special-use properties. Commercial real estate appraisers are less likely to use the cost approach for older properties due to the difficulty of precisely calculating the amount of depreciation.

The income approach is considered most applicable for investment or income properties. Appraisers gather data regarding the actual income and expenses for the subject property, rental comparables, expense comparables, industry expense data, market occupancy, and rental market trends. The commercial real estate appraiser then estimates gross potential income, other income, effective gross income, operating expenses, and net operating income. Net operating income is converted into an indication of market value using a conversion factor termed the capitalization rate, using the following formula: Read the rest of this entry »

Even though this seems obvious, a definition is a good place to start with such an important topic.

A real estate appraisal is a process to determine the value of a home or other property for pretty much one of three reasons:

1. A potential borrower wants to borrow money against the value of a property.
2. A person wants to buy or sell a house or other property.
3. Someone is involved in a family situation (such as executing a will) and they need to determine a property value.

The person who actually makes the valuation of the property is an appraiser, state licensed and regulated, trained, and experienced in real estate in the area where the property is located.

There is a big difference in appraisers, based on their training, experience, and attention to detail. The opinion of value in an appraisal report is an estimated fair market value. In other words this is the price a normal buyer would expect to pay a normal seller for the home if it were for sale. The appraiser uses local market information to arrive at this opinion of value. Read the rest of this entry »