The Difference Between Commercial and Residential Real Estate Appraisals
An appraisal is a process of identifying the value of a piece of real estate. It might seem that this process would be the same for residential and commercial properties, but the two differ in many ways. In this post, we’ll discuss the difference between commercial and residential real estate appraisals. The differences can be significant and have severe effects if you order the wrong one.
1. Commercial Real Estate Appraisals are More Complex
Many residential homes are similar in their design, layout, age, and size, particularly within the same local area. When neighborhoods are developed, builders often use only minor variations between them, resulting in a homogenous look. These similarities make a residential appraisal simpler since the appraiser is typically familiar with similar properties.
On the other hand, commercial properties are often built with many more complexities, sizes, and shapes. This results in most commercial properties being unique and needing meticulous attention during appraisal. Additionally, the operation and maintenance of commercial properties are more complex and more expensive than residential. These added complexities and maintenance costs factor heavily into a commercial real estate appraisal.
2. Commercial Appraisals Take Longer
As you might assume, because commercial properties are often bigger and more complicated, their appraisals take longer than residential properties. A residential real estate appraisal will typically take one week. Commercial appraisals usually take one month to complete.
3. How the Property is Valued
Residential and commercial properties share similar factors in how they’re valued, such as location and size. However, since commercial properties are by definition made for commerce, their income opportunity is also factored in. This includes things like rental forecasting.
When valuing a property, there are three different approaches.
- Cost Approach – This valuation approach considers what the cost of constructing a replica would be. This approach is typically used for unique properties without similar properties to which to compare.
- Sales Comparison Approach – This approach arrives at the property value by comparing it to other, similar properties. This approach is more common in residential appraisals.
- Income Capitalization Approach – This approach factors how much money the property can make from tenant rent or other income streams.
4. Commercial Appraisals are More Expensive
For the reasons above, you could have probably guessed that commercial real estate appraisals would be more expensive than residential. Because of the added effort, complexity, and analysis, commercial valuations are more expensive. However, because commercial properties are more costly per square foot, in some cases, the cost can be relatively similar to residential.
5. Two Types of Real Estate Appraisal Reports
There are three types of appraisal reports, each with its own application.
- Restricted Use Report – Only the client can use this report. It is the shortest, most limited report, only providing the essential information.
- Summary Report – This report summarizes the analysis and can be used by anyone the client wishes to include. It will include more depth into various aspects of the property and can be submitted to other interested parties, such as lending or taxing bodies.
Need a Commercial or Residential Appraisal?
Are you interested in appraising a piece of commercial or residential real estate? The more accurate an appraisal is, the better. At Titan, we deliver fast, accurate appraisals so that you can be confident in the property’s value. Contact us today to get started ordering an appraisal.