If you're on the cusp of stepping into the realm of commercial property ownership, there's one question that's likely preoccupying your thoughts: How much does a commercial property appraisal cost? Unlike the more straightforward world of residential real estate appraisal, commercial property appraisals come with their own set of rules and costs. Newcomers to the commercial property landscape are often in for a surprise when they discover the considerable difference in fees between residential and commercial appraisals.
To put it bluntly, first-time commercial property owners, accustomed to the relatively modest fees associated with residential appraisals, might experience a bit of sticker shock. The price tag for a commercial appraisal can be a lot like shopping for a new luxury car – it can leave you wide-eyed and wondering. Take a look at the snapshot below from an appraisal cost inquiry on the website BiggerPockets.com:
Angel, a first time commercial property owner was in total disbelief as to what a commercial appraisal fee would cost. Robert C. and Matt J., both seeming with more experience in commercial property, were quick to assist Angel with the realities of owning commercial property and the commercial appraisal fees associated with them.
This initial shock often sends new commercial property owners on a quest to find appraisers willing to offer the lowest possible fee. But here's where a word of caution is necessary: while the allure of a budget-friendly appraisal might be tempting, this strategy is rarely fruitful in the world of commercial appraisals. When an appraiser offers rates that seem too good to be true, it's often a red flag that corners are being cut, potentially compromising the reliability of the appraisal and putting their reputation and credibility as an appraiser at risk.
Understanding the Variables
Commercial property appraisal costs vary, and several factors contribute to these variations. By understanding these factors, you can better gauge whether your appraisal expenses will lean towards the lower end or require a more substantial budget.
Report Types: The type of report you need plays a significant role in determining the cost. The least expensive option is a restricted use report, but it provides minimal information and is primarily useful for landowners. A summary appraisal report, which is more detailed and suitable for most situations, falls in the mid-price range. On the other hand, a comprehensive appraisal report, the most expensive option, includes exhaustive details and is typically requested by lenders and litigators.
Research Extent: The depth of research required can significantly impact costs. Factors such as the property's industrial use, population changes in the vicinity, local zoning and ordinance changes, demographics, rental market fluctuations, and community elements all come into play. The easier it is for an appraiser to access this information, the lower the cost is likely to be. If information requires extensive digging and bureaucratic hurdles, expect costs to rise.
Property Complexity: Some properties are simpler to appraise than others, and this is reflected in the cost of the appraisal. Even something as basic as the size of the property can be a contributor to cost. Remember, an appraiser doesn't measure the size of your property themselves. If a full survey of the property hasn't recently been completed and the boundaries aren't obvious, this may need to be performed to get an accurate valuation, which in turn adds to the cost.
If you already own the property and you've added a lot of additional buildings and made significant improvements to the infrastructure or facilities, verifying the details of this and including them in the report may represent some complexity that is not present in most standard situations. This is particularly difficult if these additions are not a matter of public record or you don't have adequate supporting documentation—indeed, without this, it may not be possible to include them as part of the appraisal at all. (See our blog post titled "What is Gross Living Area" for additional insight.)
Valuation Methods Used in Commercial Appraisals
The Income Approach: When it comes to commercial property appraisals, the Income Capitalization Approach often takes center stage. This method is typically sufficient for many commercial properties. It involves capitalizing one year's income to arrive at a property's value. It's like taking a snapshot of the property's current income potential and translating it into a value figure.
However, in some cases, especially when dealing with properties that have multiple, varying, and intricate income streams, a more complex tool known as the Discounted Cash Flow Analysis may be employed. This approach dives deeper into the property's financial intricacies, considering the fluctuations and complexities of income over time to arrive at a comprehensive valuation. It's akin to creating a detailed financial roadmap for the property's future income potential.
Sales Comparison Approach: This method is the straightforward comparison of recent sales of similar commercial properties. It's especially useful when dealing with properties that frequently change hands.
The Cost Approach: This method calculates the value of a commercial property by evaluating the cost of replicating it. It's often applied to historic structures or properties with distinctive qualities. Appraisers assess the costs of reconstruction and subtract any wear and tear expenses.
So What Does a Commercial Appraisal Cost?
Each commercial property is unique, and its appraisal cost should reflect its distinct characteristics. While some appraisal firms have fixed pricing structures, most provide custom quotes that outline both the cost and the expected timeframe for completing the appraisal.
On average, a commercial appraisal can set you back around $3,000 to $4,000. However, don't be surprised if that figure fluctuates significantly. In some cases, it might even exceed $10,000. When budgeting for an appraisal, setting aside at least $2,000 to $3,000 is a prudent move. But don’t just take my word for it. There are several studies and research papers evidencing this figures:
A 2021 Appraiser Fee Survey by OREP/Working RE, was conducted and received responses from over 7,000 appraisers. The survey found that the average commercial appraisal fee in the United States is $4,000. However, the survey noted that fees can vary widely depending on the type of property, the location, and the complexity of the appraisal.
The Commercial Appraisal Cost Guide by Standard Valuation Services states that the cost of a commercial appraisal can range from $2,000 to $7,000 or more, depending on the type of report, the property type, and the scope of work.
The Real Estate Appraisal Costs & Prices by ProMatcher Cost Report for San Mateo County provides a range of $1,800 to $7,500 for a fixed fee - flat rate commercial real estate appraisal. It also indicates that the hourly rate for a commercial appraiser can be between $150 and $250. The fees are the same for San Francisco, Oakland, Walnut Creek, and San Jose.
The final cost of an appraisal is influenced by various factors, including the property's intended use, specific requirements, the type of report needed, local regulations, and the property's size, service, and location.
Minimizing Costs
While there are variables that impact commercial property appraisal costs, there are steps you can take to manage and potentially reduce these expenses:
Communication: Maintain an open and clear dialogue with your appraiser. Discuss your intentions and the recipients of the report to determine the minimum necessary information.
Honesty: If you own the property, be forthright with your appraiser. Concealing information that could result in a lower valuation is counterproductive. Appraisers are experts and are likely to uncover issues through their research.
Organization: Ensure that all relevant paperwork about the property is organized and accessible. Providing essential information upfront can reduce the labor involved in the appraisal, expedite the turnaround time, and lower the overall cost.
Conclusion
Navigating the world of commercial property appraisals can be daunting, particularly when it comes to understanding the associated costs. However, by grasping the variables at play, being prepared for the potential price range, and adopting proactive measures to minimize costs, you can approach this requirement with greater confidence. Remember, a well-executed commercial property appraisal is an investment in making informed decisions about your property's value and potential.
Your Trusted Appraisal Partner
At Detailed Analysis, we understand the intricacies of both residential and commercial appraisals. We provide high-quality appraisal services and personalized attention at competitive rates and turnaround times. If you have questions or need expert assistance with your appraisal needs, don't hesitate to reach out. We’re here to serve you! Give us a call today (650) 377-0337.