Financing the acquisition of a property almost always dictates having the property valued. In a residential scenario, you or the bank would hire an appraiser to give the place a once over and determine an estimated value. In a commercial setting, property valuations are considerably more complex than simple appraisals. Yet the principal is still the same.
What is interesting is that lenders value properties differently. For example, you could have three lenders all look at the same piece of commercial property in anticipation of funding its acquisition. All three could come up with a different valuation of that property. The question is, why?
There are numerous things to consider, beginning with the differences between residential and commercial property. Then there are differences in how lenders do business. Finally, some lenders handle their own valuations while others hire third-party appraisers. All these things play a role in determining a property’s value in a lender’s eyes.
Appraising Residential Property
The financial services sector sees residential property as primary residences and second homes used as vacation properties. As far as a bank is concerned, a rental home is a commercial asset inasmuch as the owner is earning business income from it.
That being the case, residential properties are appraised as-is. Appraisers do not tend to look at the potential value of a home after its new owner comes in and does renovations. They do not look at the amount of money homeowners will put into their properties over a lifetime of ownership. They are interested in current value based on the property’s condition and the values of similar properties nearby.
This being the case, appraisers tend to return fairly similar values. Five appraisers will not necessarily agree down to the penny, but they should be within the same general vicinity. There are not as many factors in play to make a significant difference in valuations.
Valuing Commercial Properties
Determining the value of a commercial property is quite a bit different. For starters, the appraiser must determine the overall condition of the property. They must understand what the property can and cannot be used for, according to local zoning laws. They then have to determine potential value after any necessary upgrades and renovations are made. Finally, they have to fully understand the borrower’s plans for the property after acquisition.
All these things are open to interpretation by individual appraisers. Furthermore, there aren’t always enough comparable properties within the local region to give appraisers a baseline for their evaluations. Thus, five appraisers can come up with significantly different valuations on the same property.
As a case in point, Salt Lake City’s Actium Partners recently made a loan backed up by fifteen acres of land in Utah. Their value determination was considerably less than a number of other lenders considering funding the project. Actium does their own valuations, and they just didn’t see the same level of value in the property.
In the Eyes of the Appraiser
It is often said that beauty is in the eyes of the beholder. You could make the same case for property valuation. Residential property is less prone to drastically different appraisals because there are more hard and fast rules in place. Commercial properties are another matter. There are so many things to consider that multiple appraisers can come up with considerably different numbers. That is just the way commercial property works.
At the end of every valuation, an appraiser is making their best guess. That much is common to both residential and commercial properties. And as with any kind of guess, there are never any guarantees.