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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2007

The Appraisal Process: Compare and Contrast

Understanding how lenders value commercial properties can help you navigate the business effectively

As more residential mortgage brokers get deeper into the commercial side of the business, it’s a good time to expand your knowledge about various details of the commercial process. There are key differences between residential and commercial lending. Having a better understanding of commercial transactions helps you navigate the process more effectively while managing your clients’ expectations.

Key Appraisal Differences

Time: 5 to 10 days
Cost: $300 to $450
Length: 10 to 15 pages
Comparables: Many
Properties: Often cookie-cutter
Details: Brief area description

Time: As long as 4 weeks
Cost: $1,500 to $4,000
Length: 55 to 100 pages
Comparables: Limited
Properties: Individualized
Details: Extensive market data

Appraisals are one of those key differences. The appraisal is central to the commercial loan process because commercial lenders focus more on the subject property — unlike residential deals, in which lenders look at the borrowers. Although some commercial lenders consider the property and the borrower, the appraisal still plays a significant role in the real estate valuation for all transactions.

Studying the appraisal’s fine points, as highlighted below, will give you a valuable understanding that enhances your ability to manage expectations and proactively diffuse objections when working with a commercial loan.


When it comes to commercial properties, the difference in comparables is significant. In the residential world, it’s easy to find properties with similar characteristics to make comparisons and to determine an accurate valuation. Homes have a primary purpose and generally are easy to compare based on square footage and the number of rooms. Properties in suburban developments, for example, often are homogenous, thus making comparables readily available.

This is not the case with commercial properties, however, which are much more heterogeneous. It is difficult to find a commercial building that has equivalent dimensions in a similar area and that serves similar purposes. This makes the valuation more challenging.

Because of these limitations for comparables and because of different methods of valuation, the commercial-appraisal process varies substantially from the residential-appraisal process in this regard.

Timing and cost

Appraisals for residential properties tend to be simple and fast. On the other hand, commercial appraisals are more detailed and demand more preparation time. As a result, they cost more.

Because of the complexity of appraising a commercial property, appraisers must have additional training and special licensing. They often are either certified-general appraisers or Member Appraisal Institute-certified appraisers.

The only security commercial lenders have for the money they lend is the subject property, so they rely on professional appraisals by a state-certified general appraiser. Certified-general appraisers have more experience and education than certified appraisers who typically conduct a home appraisal. Certified-general professionals can appraise more-complex commercial properties, according to the Uniform Standards of Professional Appraisal Practice.


There are three approaches to valuing a commercial property: income capitalization, sales comparison and cost.

The income-capitalization approach estimates the property’s current value based on the income it is expected to generate in the future. Specifically, a property is worth the amount of rent the tenants will pay based on leases — or rent-in-place — that extend over the year or next several years.

The sales-comparison approach is most useful when a number of similar properties have been sold recently in the immediate vicinity of the subject. With this approach, the appraiser derives the value by comparing several elements of the subject property with those of similar properties.

Finally, the cost approach looks at the property’s value as equivalent to the estimated value of the land plus the current cost of constructing the existing structure. This approach is most effective when valuing a new or nearly new property or when valuing a special-use property for which sales comparables are difficult to locate in the market.

In addition, there are two types of commercial appraisals: limited and complete. A limited appraisal uses one approach to valuing property — either the sales-comparison or the income-capitalization approach. Limited appraisals tend to be easier and less time-consuming. Therefore, they are less expensive.

The complete appraisal incorporates two or three approaches to value, making it more costly. Most traditional lenders require complete appraisals to make a financing decision.

In the small-balance commercial space, however, some lenders may permit limited appraisals for certain property types. This not only saves time in the process, but it also saves money for the borrower.

•  •  •

Finally, the commercial-appraisal report is usually in the form of a summary or narrative report. It’s lengthier than the typical residential appraisal because it contains a multitude of in-depth market research. Where a home appraisal is normally 10 to 15 pages, a commercial appraisal can be 50 to 100 pages.

As you evaluate small-balance commercial lenders, ask how they handle appraisals. Lenders that permit limited appraisals and work with a competitive network will not only take some of the work off your hands, but they also can reduce costs and time for you and your borrowers.


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