Real estate appraisals are used to figure out how much the property is worth. They are helpful and usable in many property-related aspects, for example when we are buying, selling, or even want to get some financing through many real estate loans that are offered by facilities. There are many key indicators for real estate valuation, including the complexity, valuation techniques, the intended use, and sometimes the whole process is slightly different for residential and commercial properties. So, let’s below understand what factors the appraisals pay attention to during residential vs commercial appraisal procedures.
Residential Appraisals
In neighborhoods where homes were constructed at the same time or by the same developer, the design, layout, and amenities of residential properties are frequently more standardized. This uniformity sometimes gives the appraisers the green light to use a sales comparison approach as their primary method, which makes the appraisal process simpler. During these processes, the industry experts pay attention to some indicators such as square footage, bedroom and bathroom numbers available in the property, the latter’s condition, and the upgrades it has received throughout the years, the lot size and existing amenities, and of course, the age of the building.
Why are these indicators taken into account?
Starting from the square footage of the real estate appraisal comparison as larger homes are typically valued higher. During the process of appraisal, the expert will compare the square footage of the property to other similar-sized houses that have been recently sold in the neighborhood. The available quantity of bedrooms and bathrooms are also key factors during the property’s valuation as houses that have more rooms have higher prices in the market.
After considering the property’s square footage and the number of bedrooms and bathrooms, the appraisal continues with checking the condition of the property and whether there have been any upgrades during the whole usage of the property. The purpose behind this is that properties that are in good condition and have some upgrades towards modernity, for example, modern kitchens, bathrooms, and flooring, are typically valued higher and if there are no significant upgrades, the appraiser may recommend some repairs to slightly increase the property’s value.
The lot size and amenities are typically about the lot size and the amenities it offers, for example, if the property has an outdoor space, pool, garden, etc. Lastly, a great appraisal indicator is the age of the property as older homes typically have some property value differences especially if they are not as well-maintained.
Commercial Appraisals
The valuation of commercial properties is typically more complex compared to residential ones, as commercial properties have different types, usage, and income potentials. So, each commercial property has the potential to be used for different industries, for example, retail, office, industrial, or multifamily. Because of these factors, the appraisal of commercial properties is divided into a few categories, including the income potential from the tenants, operating expenses, market conditions, and zoning regulations.
The importance of these categories
When deciding on the commercial property’s value, the first indicator is typically the income potential that the property can have. During this stage, the appraisals pay attention to the rental income, vacancy rates, and the long-term opportunity of cash flow. For example, we can compare offices with long-term and high-paying tenants and offices with short leases and inconsistent rental income. As a result, we’ll see that a steady and beneficial income potential has long-term lease properties. Property management fees, utilities, insurance, and other operating expenses are all taken into account by commercial appraisers. Because it is more profitable, a building with lower operating costs may be valued higher.
One of the other key aspects is the local market’s state, in other words, the demand level for office space, retail growth, or industrial expansion. To determine how the general real estate market affects the property’s value, the appraiser must look at forecasts and current trends. For example, the value of a commercial property in a growing business district may be higher than that of a property in a region where the economy is struggling.
However, the property’s value can also be affected by the zoning laws. A property with mixed-use development zoning may have a higher potential value than one with only industrial or single-use uses. Either the property must be appraised in accordance with local zoning regulations or the cost of doing so must be assessed by appraisers.
What are the valuation methods?
There are three general valuation methods that property appraisals use for building valuation. However, they are slightly adjusted to fit the residential and commercial property valuation requirements.
The residential property valuation methods
Starting from the sales comparison approach that refers to comparing the recent sales of similar homes. Then the appraisals proceed to the cost approach; for the residential properties they pay attention to unique properties that many tenants can find beneficial; then they evaluate the replacement cost if needed, minus depreciation.
The commercial property valuation methods
In commercial appraisals, the income capitalization approach focuses on the property’s potential for rent or lease agreement income. The current rental rates, occupancy rates, and anticipated future income are all evaluated by appraisers. Similar to residential appraisals, but with a more in-depth look at depreciation and replacement costs, the cost approach is also used.
Due to the variety of commercial real estate types, the sales comparison approach is also a part of this process, though it needs careful comparison with other commercial properties with comparable features.
Conclusion
There are many important differences between residential and commercial property appraisals. One of the main being the complexity. Due to the uniformity of a neighborhood’s homes, residential appraisals are typically simpler, whereas commercial appraisals are more complex and take income potential, market conditions, and zoning regulations into account. Commercial appraisals frequently incorporate the income capitalization and cost approaches, whereas residential appraisals frequently rely on the sales comparison approach. The process is also influenced by the intended use: residential appraisals are typically used for individual transactions or mortgage lending, whereas commercial appraisals are essential for investment analysis, leasing potential, and business operations.
