Investor Tips for Navigating the Commercial Appraisal Process

Commercial properties being obtained as investments may have to be appraised before a lender will approve financing. But even when a lender appraisal isn’t required, and investors best interests are served by having one done anyway. Appraisals are valuable tools designed to help investors and lenders understand a property’s true value.

Investors increase their chances of a smooth valuation of a target property by paying close attention to three things: market comparables, property condition, and documentation. The need for a smooth valuation is especially important when an investor is looking to obtain an income-producing property that will be used as collateral for the loan being sought.

Let’s look at the three key areas, beginning with documentation. Note that for the rest of this post, the focus will be on working with private lenders offering hard money loans. Lenders like Salt Lake City’s Actium Lending finance the lion’s share of commercial property acquisitions.

Documentation and Preparation

Some lenders want to do their own appraisals before making a lending decision. Others are happy to trust the appraisal of the borrower prior to making an offer. Either way, an investor is probably going to want his own appraisal. Therefore, it’s important that borrowers insist on licensed and insured appraisers with experience in both commercial property and state regulations.

In addition, borrowers should make a point of:

• Curating documents relating to maintenance history, recent improvements, rent rolls, leases, etc.
• Requesting ‘as if complete’ valuations if property renovations or improvements are planned for the future.
• Providing any supporting specs and contracts that offer a more complete picture of a property’s potential value.

Being prepared with the proper documentation adds weight to a borrower’s appraisal. Hard money document requirements are significantly less compared to traditional financing, but the right documents are still needed to secure a loan. Lenders thrive on the right documents.

Property Condition and Market Comparables

Investors can ensure a smooth valuation by giving some time and attention to the property’s physical condition. For starters, the property should be clean and accessible to appraisers. If necessary, an investor should insist that the seller handle routine maintenance so that the property looks as presentable as possible when appraisers arrive.

Borrowers should also be prepared to:

• Identify at least three comparable properties, within at least a few miles that were sold within the last 3-6 months for comparison.
• Explain any material differences between the property being appraised and the local comparables.
• Justify property improvements to ensure they align with the market expectations of comparable properties.

One of the big concerns in hard money is overcapitalizing a property. Doing so jeopardizes both lender and borrower. On the other hand, doing one’s due diligence in terms of property condition and market value reduces the risks of overcapitalizing.

Additional Tips for Investors

Proper documentation and market comparables are especially important to lenders. But ensuring a smooth valuation doesn’t end there. There are still more things borrowers can do to improve the appraisal process:

• Verify the accuracy and completeness of all data pertaining to the property.
• Insist on an in-person appraisal alongside any Automated Valuation Model (AVM).
• Present the lender with clear Net Operating Income (NOI) calculations and other pertinent information.
• Clearly communicate the intended purpose for the property once obtained. It matters to lenders.

One final tip is to be proactive. A borrower is expected to do certain things in order to facilitate a smooth valuation. They should never wait to be instructed. Rather, taking a proactive approach to meet one’s responsibilities takes the pressure off the appraiser and the lender.