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10 Questions To Ask Before Hiring a Commercial Real Estate Appraiser
Before employing the services of a commercial real estate appraiser, it makes sense to engage potential appraisers in a thorough discussion about their appraisal experience, business background and general viewpoint about the type of property you would like to have appraised. Some relevant questions that you would want to ask include:
1. Do you currently have a Certified General appraisal license from the state the subject property is located in? A Certified General appraisal license is required to value commercial property in most states. Furthermore, an appraiser who holds state-certified licensure shows his level of professionalism that will make the client more comfortable when ordering an appraisal.
2. Are there any other distinctive designations held by the appraiser such as the MAI or RM from the Appraisal Institute, or the AM or ASA from the American Society of Appraisers? Although specialized designations are not required to perform commercial real estate appraisals, it shows that the appraiser has met the rigorous requirements concerning schooling, testing, and skills from experience. Appraisers with specialized designations are tested on their demonstration of understanding, knowledge of the overall appraisal process, and the ability to solve the challenging questions accompanying the many types of commercial property.
3. Have you appraised any other commercial properties in the subject property’s market area before? Though not absolutely necessary, it certainly helps when the appraiser is geographically competent and familiar with the local markets. Otherwise, the appraiser may have predetermined value indicators in his head, when the market may actually reflect something vastly different.
4. Have you appraised this particular type of property before? The appraisal of commercial real estate can include many different scopes of work, from simple assignments such as office or industrial buildings, to complicated properties, including land trust conservation easements or going concern values. Under most state’s appraisal certification Competency Rule, the appraiser is required to disclose a lack of experience and/or knowledge to the user of the appraisal before accepting the assignment. If the appraiser discovers at any point in the appraisal process that they lack the adequate knowledge and experience, they must stop work immediately to prevent the development of unreliable assignment results. It’s important to know whether or not the appraiser you are about to hire is familiar with the specific type of property that you want appraised.
5. If you haven’t appraised this type of property before, what will you do to familiarize yourself with it? The appraiser can affiliate with someone who has more experience for a particular type of property. Affiliation with an appraiser who has more experience can reduce a lot of the risk associated with an appraiser who is inexperienced. He can also study and do research to determine the best methodology for appraising the property.
6. How long have you been in the appraisal industry? A lack of years in the appraisal business does not necessarily mean that the appraiser is incompetent, but it does provide you with a basic understanding of their lack of experience.
7. What techniques or approaches to value are the best for appraising the type of property I need appraised? Asking this to a few different appraisers will tell you if an appraiser is trying to take a shortcut by providing less approaches.
8. What information do you need from me to write the appraisal? Appraisers often need documents up front such as (but not limited to) rent rolls, leases, income and expense statements, building plans, building costs, surveys, floor plans, etc. The sooner this information is provided to the appraiser, the quicker the appraiser will be able to complete the assignment.
9. What is the cost and the timeline for completion of the appraisal? Someone ordering an appraisal will want to know the answer to this upfront. If an appraiser is backlogged with assignments, you may want to find someone else to the appraisal. Basic statistics suggests that the more backlogged an appraiser is, the more expensive and longer turnaround time for the appraisal.
10. Can you provide me with a few references from your current clients? Like with all professional services, you should feel comfortable with the professional appraiser on several points, such as their professional competence, technical know-how, and their timeliness.
These 10 questions should be able to guide anybody through the appraisal-ordering process. Even someone who has never ordered an appraisal before can feel secure with their decision making if these questions are employed.
Estimating Capitalization Rates – Part III
In the first two parts of this series, we have introduced and defined four different methods of estimating capitalization rates. In this part of the series, we will take a detailed look at market-derivation methods and the factors that should be considered when extracting market-derived capitalization rates. As has already been discussed in the previous two installments of the series, market derivation is the most reliable and applicable approach in most cases. The band of investment and debt coverage ratio methods are the next best options, and the investor survey method can be a reliable check for the other methods.
The market derivation method is important because it is closely tied to market activity and it can easily be understood my market participants. It provides the best insight into how investors in the subject’s unique market are actually making decisions. Most of the drawbacks of a market derived capitalization rate occur when the appraiser does not consider that these rates are being extracted from comparable properties. The comparable sale that the capitalization rate is being extracted from should share similar characteristics with the subject property. The appraiser must consider if the comparable is similar to the subject in terms of quality, location, investment grade, and occupancy.
The date of sale of a comparable must be considered, in case conditions related to income rates and supply and demand may have changed. Since market derivation is partially a sales analysis, financing terms and conditions of sale should also be considered. Additionally, it is important that the income sources for the comparables be considered. The appraiser should analyze if the leases are at market rates, as well as the credit quality of the current tenants. Another important consideration is the type of buyer. Different types of buyers may have different expectations in regards to return requirements. For example, a real estate investment trust may have different requirements than and institutional buyer. When these factors have been fully considered and similar comparables can be produced, the market derivation rate is very reliable and the other methods can be used as a check. When market extracted capitalization rates are not available, the appraiser can turn to the other methods to produce a capitalization rate. In the final part of this series we will take a look at the factors that must be considered in the reconciliation of a capitalization rate.