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Commercial Appraisal

Introduction to Commercial Real Estate Appraisal

March 26, 2011

The valuation process is a systematic approach that a real estate appraiser uses in order to provide a client answers to questions they have regarding the value of real property. A wide variety of value related questions can be solved when this process is modified correctly and applied by an appraiser.

The first step in the valuation process is that an agreement is made between the client and the appraiser. The appraiser agrees to provide a valuation service in return for a fee. An opinion of the market value of a particular property is the primary objective of most appraisal projects. In general, once an appraiser delivers the results of the appraisal to the client, the service agreement is completed. The valuation process includes all of the necessary steps to accomplish these valuation tasks.

As in the scientific method, the valuation process follows a specific set of procedures. The number of steps is dependent on a variety of variables. The model supplies a pattern for the application of valuation methodologies. This allows the appraiser to combine market research and data analysis through appraisal techniques to form an opinion of value that is well supported. Models are also the standard by which appraisers judge the value conclusions of one another.

Once an appraiser has been assigned a property, research must be completed in order to obtain a suitable understanding of the market in which the property resides. Trends are observed all the way from an international perspective down to the local or regional level. This market analysis allows the appraiser to have a grasp on the dynamic relationships between the forces, factors and participants involved in the real property value. Quantitative data about market trends is also extracted during the research phase.

The overall goal of any appraisal project is to obtain a defendable value assumption that reflects the important factors involved in the market value. The property must also be valued with its intended use in mind.

To come to a value conclusion, three primary methodologies are used in combination. The three are:

1. The Cost Approach Method – derived from the present cost of reproducing the existing structure including entrepreneurial incentive or profit, deducting the loss from depreciation from the total cost, plus the estimated land value.

2. The Sales Approach Method – derived from comparing the property to recent sales of comparable properties in the same market.

3. The Income Capitalization Method – derived by converting its anticipated earning power into property value.

Each of these three methods is interconnected. In order to complete the process, the appraiser will draw from data gathered from each methodology and develop a real property value. This value can either be a single value estimate, or a value range.

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