Commercial property appraisers use three primary methods to evaluate property investments: the income capitalization approach, the sales comparison approach, and the cost approach. The market value of a piece of property compares prevailing rates in a given market for similar properties as of a specified date. Commercial property appraisals consider many factors that influence the highest and best use of the commercial property. Seemingly subjective and arcane, appraisals are completed by an actual person, which leaves room for deliberate abuse or investment fraud, but federal regulations implemented by the Equal Credit Opportunity Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act seek to address these shortcomings.
On January 15, 2013, six federal agencies approved a rule setting higher appraisal standards for lending institutions offering higher-risk loans to consumers. The rule gives lenders additional time to institute Consumer Financial Protection Bureau (“CFPB”) appraisal standards for such loans, which now requires a written appraisal by a certified or licensed appraiser who has physically inspected the property, and a second appraisal for properties being quickly turned around for higher resale. The rule goes into effect January 10, 2014, giving lenders time to implement the new laws encouraging the use of highly trained and competent real estate appraisers and making the appraisal process more transparent for investment risk assessment and return.
Regulatory Changes Generate Investor Opportunities
Ferstl Valuation Services welcomes the recent regulatory changes because they generate legislative imperatives for appraisal companies to provide the kind of high-quality, trusted appraisals that our team of certified appraisers has provided for over 45 years. Certified appraisers must follow a strict code of ethics to provide unbiased opinions or face disciplinary action. The new rule requiring a second appraisal on quick turnaround investments will help to prevent wrongdoers from ignoring major structural weaknesses in properties, which would require major renovations to bring them up to code for new commercial purposes.
Mortgage lenders use the commercial appraisals to assess the property, and can authorize additional appraisals that focus on anticipated market conditions, testing new usage proposals, and determining the impact of changing the tenant demographic of rental investments. These studies could slow the speed of implementing new business projects, but the benefits of more accurate valuations should prevent many bankruptcies and foreclosures.
Investors can rely on the appraisal report to conduct best-usage studies in determining the costs and feasibility of making upgrades to building infrastructures to realize maximum value from their investments. Some commercial business proposals prove physically impossible, require zoning-change proposals that might not win approvals, or fail to meet the needs of changing demographic makeups of the surrounding region. Feasibility studies can help to determine these risks.
Choose the Right Commercial Property Appraiser
Ferstl Valuation Services welcomes the recent regulatory changes because they generate legislative imperatives for appraisal companies to provide the kind of high-quality, trusted appraisals that our team has provided for over 45 years.
Commercial property appraisals investigate zoning records, conduct physical inspections, compare sales and replacement costs, study demographic and lifestyle information, and estimate the costs of upgrading deficiencies and compare these expenses to the potential profits that new business uses might realize from proposed commercial undertakings. Mortgage lenders must institute appraisal standards for higher-risk loans that include conducting more thorough appraisals that utilize these strategies, and investors can study mortgage-lender appraisal records before committing to projects.
Commercial investors have the right to view written reports from appraisers, and brokers and lenders cannot charge clients for the privilege. Savvy investors can use the consumer protections of other government regulations to explore more lucrative investment opportunities that appraisals might uncover, which could provide extremely valuable best-usage intelligence.
Contact Ferstl Valuation Services for comprehensive assistance when conducting commercial property appraisals. The company offers valuable insights using various appraising tools that include market studies, marketability studies, feasibility analyses, cost and investment analyses and determining the best uses for each commercial property.