By George Blackburne<\/p>\n
A borrower can expect to pay between $2,000 and $4,500 for an appraisal, if he needs a commercial loan. Multifamily appraisals are slightly less. The reason why commercial real estate appraisals are so expensive is because each commercial property is unique. In addition, the appraiser has to perform an extensive rental comparable’s analysis, an income and operating cost analysis, a comparable sales analysis, and a cost analysis.<\/p>\n
Commercial real estate appraisals can be quite extensive, as thick as thirty to fifty pages. The appraiser needs to determine, for example, if each lease provided to the appraiser reflects the current market rent of the property or whether the rental amount is out-of-date, meaning it is too high or too low. \u00a0The lease might even be fraudulent. \u00a0This can often only be determined by checking the rents of a number of similar properties nearby.<\/p>\n
Did the borrower provide the appraiser with his actual<\/em> operating expenses or did he fraudulently slip in some understated expense numbers, in order to make his net operating income look higher?<\/p>\n The appraiser also has to carefully analyze the cost of the commercial building’s construction, to help determine the fair market value of the building and to determine if the rental rate is reasonable.<\/p>\n Image if a developer could build an office building for just $1 million and lease it out for $1 million per year<\/em>. \u00a0Clearly something is wrong; otherwise, why aren’t capitalistic developers rushing to build competing office buildings? \u00a0That lease for $1 million per year smells awfully fishy.<\/p>\n Whether the borrower pays $2,000 to $2,500 for a commercial appraisal or $4,000 to $4,500 for the appraisal depends on the qualifications of the appraiser.<\/p>\n It is the commercial lender who determines the minimum qualifications of the appraiser. \u00a0If the loan amount is small, a bank may only require a General Certified Appraiser. \u00a0If the loan amount is large, or if the property type is unusual (think movie complex), the bank will likely require a MAI appraiser.<\/p>\n A General Certified Appraiser<\/b><\/em> is one who has been extensively training in the three approaches to value – the Income Approach, the Sales Comparison Approach, and the Cost Approach. \u00a0In order to be awarded the General Certified Appraiser designation, the state will usually require a large number of training courses in the valuation of commercial property, will test the candidate extensively, and will require that he or she have a certain level of appraisal experience.<\/p>\n General Certified Appraisers are usually pretty good, and they typically charge between $2,000 to $2,500 for an appraisal of a commercial property valued up to $6 million or so. Small banks and hard money lenders are the commercial lenders who will most often require just a General Certified Appraiser.<\/p>\n Larger banks, when valuing commercial properties worth more than $6 million to $7 million or so, will usually require a MAI Appraisal.<\/p>\n MAI stands for Member, Appraisal Institute<\/b>, a private, well-respected professional \u00a0association. \u00a0The Appraisal Institute defines a MAI Appraiser as an appraiser who is \u00a0experienced in the valuation and evaluation of commercial, industrial, residential, and other types of properties<\/b>, and who advise clients on real estate investment decisions.<\/p>\n MAI Appraisers are like the CPA’s of the appraisal industry. \u00a0They are the top of the food chain. \u00a0They are most highly trained and experienced commercial real estate appraisers in the industry.<\/p>\n MAI Appraisers will typically charge between $4,000 to $10,000 for an appraisal assignment. <\/b>\u00a0For most commercial property owners, borrowing from a bank, the MAI appraisal will cost you between $4,000 and $4,500.<\/p>\n Borrowers, brokers, and mortgage brokers should never order the appraisal themselves. <\/b>\u00a0If they do, the cheapest commercial lenders will NOT be able to use it.<\/p>\n Do you remember the Savings and Loan Crisis back in 1986, when over 1,000 S&L’s went bankrupt? \u00a0They lost billions of dollars, in large part due to bad appraisals. \u00a0Developers were ordering the appraisals themselves from crooked MAI appraisers. \u00a0They would shop an appraisal assignment until a MAI Appraiser promised to bring in the appraisal at the value the developer wanted. \u00a0The joke back in those days was that MAI stood for “Made As Instructed.”<\/p>\n The law that eventually cleaned up the appraisal industry was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989<\/b> – pronounced FIRREA (like diarrhea).<\/p>\n After the passage of FIRREA, state laws were passed to license and regulate real estate appraiser. \u00a0The appraisal industry became far more professional and ethical, and the prestige of the Appraisal Institute itself recovered its lustrous reputation.<\/p>\n But let’s get back to the issue that a borrower or a broker must never order the appraisal themselves. \u00a0Under FIRREA, it is illegal for an insured bank or savings and loan association to accept and use an appraisal ordered by a borrower or a broker.<\/p>\n