3 Major Myths about Commercial Real Estate Appraisals

Commercial real estate appraisals are seen quite differently depending on whose eyes they are seen through. Lenders consider it their basis for the whole process just after the borrower’s ability to pay, while borrowers see it as a necessary evil. There are many things that those not directly involved with the process do not understand about commercial real estate appraisals, and as a result, certain myths about them have become prevalent.

Myth # 1: The approximate worth of a building can be determined by looking at the outside of it.

This is simply not the case. There is far more involved in determining the value of a building than the condition of the outside. An exterior-only inspection will not consider any improvements that have been done on the inside. In addition to an exterior inspection, the following factors weigh heavily on the determination of worth:

• Amenities
• Layout
• Condition

Even outside improvements such as weatherization cannot always be determined just by looking. In short, it takes much more than a simple look at the outside of a building to determine its value.

Myth # 2: Assessed value should approximate market value.

Though many states support this, and in an ideal world it would be so, due in part to the factors listed above it just is not so. The county property appraiser may not be aware of small improvements that have been made which can make a powerful impact on market value. Inside improvements and weatherization measures are again examples.

Myth # 3: Market value should be approximately the same as replacement value.

Market value is determined by how much a reasonable buyer would be willing to pay for the building and how much a reasonable seller would be will to take for it free from pressure to buy or sell. Replacement value is how much it would cost to rebuild the building in-kind. The two can actually vary greatly. By the transitive property, if you remember geometry at all, if assessed value does not necessarily equal market value, and market value does not necessarily equal replacement value, then assessed value cannot truthfully be said to always equal replacement value. Too much comes into play, specifically market conditions.

While much is misunderstood about commercial real estate appraisal by those who are not appraisers, these are some of the most prevalent myths out there, and the cause of great misunderstanding when it comes to borrowing money for commercial property.