Let's Discuss! Commercial Real Estate Vs. Residential Real Estate Appraisals
Updated: Aug 28
In the world of real estate, it is important to take notice in the differences and similarities of Commercial and Residential Real Estate, especially in terms of the Appraisal Process.
Commercial Real Estate Appraisals
What is considered as Commercial Real Estate?
Property that has the potential to generate profit through capital gain or rental income.
Property Types Include:
Special Purpose (i.e. amusement parks, churches, self-storage)
Fun Fact! This category also includes apartment buildings with more than 4 units and student housing (dorms).
What are the main takeaways from Commercial Real Estate Appraisals?
There are many difference between Commercial and Residential Real Estate especially when it comes to Appraisals and the way in which they are conducted.
Commercial Real Estate Appraisals are more detailed and intricate -- they can be north of 100 pages long. Due to the intricacy and length, the average turnaround for a report can be one-month.
There is greater variety in the types of Commercial Real Estate, which can create additional complexities in the valuation.
The Valuation Approach between Commercial and Residential Appraisals are also quite different. Commercial Properties will rely on one of three approaches: Cost, Sales Comparison and Income Capitalization.
Cost Approach provides a value indication that is the sum of the estimated land value, plus the depreciated cost pf the building and other improvements.
The total cost of constructing a new building today frequently sets the upper limit of value, assuming the building is the *highest and best use for the land.
*Highest and Best Use: the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible and that results in the highest value.
Sales Comparison Approach
This approach refers to a real estate appraisal method that compares one property to comparables or other recently sold properties in the area with similar characteristics.
This method accounts for the effect that individual features have on the overall property value. This approach is utilized within Commercial and Residential Appraisals.
Income Capitalization Approach
This approach allows investors to estimate the value of the property based on the income that the property generates.
It is used by taking the net operating income (NOI) of the rent collected less operating expenses and dividing it by capitalization rate.
Residential Real Estate Appraisals
What is considered as Residential Real Estate?
Property (both land & buildings) used for housing. These properties are specifically zoned for housing and it is set by local zoning ordinances.
Property Types Include:
Multi-family residences (up to 4 units)
What are the main takeaways from Residential Real Estate Appraisals?
Most residential properties follow a standard form resulting in a homogenous look. Due to this, most Residential appraisals have a turnaround of one-week.
Residential Appraisals are needed for most home purchases and refinancing through loans. Most loans require homes to be appraised for equal or greater value of the purchase price.
Where is the Overlap?
Commercial and Residential real estate appraisals have a few moments of overlap in practice. Both categories of real estate may use the valuation approach of Sales Comparison, as lined out above. As mentioned before, this approach relies heavily on location and properties in proximity, known as "comps." Also, in order to perform valuations for either commercial or residential purposes, the appraiser must be state licensed.