The Commercial Appraisal Path — What to Expect
This article is for those interested in learning what it takes to add commercial and multifamily (4+ units) appraisal services to your practice, whether you work for a firm or run your own practice. This article will focus on non-complex commercial and multifamily appraisal — smaller properties which tend to be locally traded.
It’s not trivial, but the education, tools, and resources are in place for those seeking to expand their residential appraisal skills and services to the rewarding world of commercial and multifamily appraisal.
Is Commercial Work for You?
First things first: is commercial work a good fit for you? Education and skills aside, answering these questions will give you an idea of what to expect:
- Do you like to manage complex projects that require extensive research and writing?
- Are you excited about the opportunity to deeply engage with a single appraisal assignment over the course of a week or more, immersing yourself in the intricate details and comprehensive analysis that it entails?
- Are you comfortable with a scope of work that requires different valuation scenarios, several sets of comp data, multiple approaches to value, and an intricate reconciliation process?
- Are you comfortable working with long narrative documents, shifting frequently from one report section to another?
- Do you value pride in work over billings?
- Do you want to become an expert in a new field?
If these questions stir you in a positive way, read on!
What to Expect
- A learning journey
- New methods and skills
- New research domains
- New software
- Commercial appraisal is an immersive experience, preparing lengthy documents with many interrelated parts. We use the word preparing rather than writing here because the amount of writing actually required is a fraction of the total document (assembling also describes the process). Indeed, with modern software, much of the input can be streamlined with form inputs and a database of narrative snippets. Still, writing, explaining and formatting is an integral part of the narrative report process.
- New appraisal paradigms — multiple appraisal scenarios within a single report. These are typically “As Stabilized” and “As Is” scenarios, sometimes with variations of fee simple and leased fee analyses. This may sound complex, but taken one step at a time, it’s totally manageable.
- Validating analysis components is a best practice in commercial work. What this means is validating each step and sub-step as you work through the appraisal. For example, with residential work, you validate the sales analysis by checking net and gross adjustments, proximity, and more. It’s no different in commercial work, but the parameters are different and validation is applied across more aspects of the analysis. For example, in the income approach, validating the gross income, net income, expense ratio, and cap rate are best practices.
- Narrative reports require a more focused style of working. Time management skills are key.
- Inspection logistics: Often with commercial work inspecting the entire property is not practical or possible due to tenant privacy and business operations. When inspecting the entire property is not an option, the goal is to inspect representative areas.
- Subject financials are a significant aspect of subject property research and due diligence. Expect to have follow-up queries on financials.
- Expect a high level of ambiguity compared to residential appraisal. Comparable sales, leases, vacancy, expenses, cap rates, and costs will often show a broad range of indicators for similar properties, reflecting the diverse nature and use of commercial spaces. Additionally, the financials of commercial properties can vary significantly from year to year, influenced by factors such as market demand, lease agreements, and operational efficiency. Yet, with sound analyses these broad indicators can be distilled into supportable conclusions.
- Expect interesting work, personalities, and new insights to the economy of your market area.
- Expect low pay and long hours while you learn new commercial and multifamily skills.
- Expect good pay when you are proficient and potentially lucrative income if you earn expert status in a niche.
- Expect more demand for your diverse residential and appraisal skills and services.
- Expect some insulation from the interest rate sensitive mortgage appraisal market.
- Expect more opportunities for non-bank work.
The Learning Journey
The learning journey is not as arduous as you might think, and in my view, it is super interesting. And you have a huge advantage in learning; as an educated and trained residential appraiser you have an existing tree of knowledge to which you can readily add new knowledge contextually. Research tells us that when we add new knowledge to existing knowledge, it becomes easier to understand, remember and apply.
There are three new domains of learning:
- New appraisal methods. The income approach will be a new domain. Again, taken step by step, this is very manageable. In addition to new methods, you will learn new ways to use the Sales Approach with price per square foot and unit analyses and important new aspects of the EGIM analysis. You will learn why the final reconciliation process weighs approaches not only on the quality and quantity of data, but also the relevance of the approaches based on the most probable buyer.
- New research domains. You might be surprised by the types and number of analyses that require comps. Sales Comps, of course, but also cost comps, rent comps, expense comps and cap rate comps.
- Software. If you are working for others and they have established templates and a database, or hopefully a professional software application, you will most likely need to learn these systems. If you have a choice, professional software is the way to go as you can easily exceed the expense of software in time developing your own solution.
Education is the first step. The first thing I recommend is reviewing several commercial and multifamily reports. I’ve provided a sample mixed-use template at the end of the article. I’ve also provided some resources for finding sample reports below. While you will want to study both commercial and multifamily reports, for residential appraisers multifamily tends to align more closely with your work experience may help more easily bridge the gap with learning narrative report wiring.
As an experienced residential appraiser, you will quickly see the appraisal framework spread out across the narrative. I encourage you to delve deeply into the income approach, as this represents a significant portion of the new skills and knowledge you’ll acquire learning commercial appraisal.
The goal of this exercise is to gain familiarity with the scope and range of narrative report content. It may seem overwhelming at first, but keep in mind that modern software facilitates much of this process.
Next, or simultaneously, work on your formal education. There are two main areas to focus on; the Sales Approach, which will be relatively easy to learn given your background, and the income approach, which will open a new world of analysis for you, intricate and detailed with numerous sub-analyses.
- Bachelor’s degree: All CGAs must hold a bachelor’s degree from an accredited college or university in any field.
- 300 hours of qualifying education: You’ll need to complete coursework covering topics like valuation theory, market analysis, appraisal methods, and ethics. These courses must be approved by your state licensing board.
- 3,000 hours of supervised appraisal experience: This experience must be gained under the supervision of a qualified appraiser and documented meticulously.
- 1,500 hours of non-residential experience: At least half of your experience hours must be for non-residential properties like commercial buildings, industrial facilities, or vacant land.
- Pass the National Certified General Real Property Appraiser Exam: This rigorous exam tests your knowledge of appraisal principles and practices.
- Background check: You’ll need to pass a background check to ensure your eligibility for licensure.
- State licensing application and fees: Submit your application and required fees to your state licensing board.
Resources for further information:
- The Appraisal Foundation: https://www.appraisalfoundation.org/
- The Appraisal Institute: https://www.appraisalinstitute.org/ & https://www.appraisalinstitute.org/education/upgrade-your-career/commercial-path
- Your state’s real estate licensing board: You can find contact information for your state’s board through the Appraisal Foundation website.
Remember, these are general requirements, and specific details like approved courses and experience documentation may differ in your state. Always check with your state licensing board for the latest and most accurate information.
Gaining 1,500 hours of non-residential work is the crux of the experience requirement. Many firms hesitate to undertake this endeavor because it’s a drain on production. On the other hand, many commercial appraisers are aging out and the industry needs new talent. Some national firms have implemented trainee programs to fill the pipeline. My advice is to complete at least two basic courses, sales comparison analysis and income analysis before you seek experience.
Find a mentor if possible. If you can work as an apprentice under a mentor, take advantage of the opportunity. And understand and respect that both of you will probably make less money during an apprenticeship. Training new appraisers is a crux within the industry — if you are lucky enough to find a mentor, be useful!
On your own without a portfolio of work? There are a couple of approaches here:
- Write a sample appraisal. Take a neighborhood you know, offer a free appraisal for someone you know, or make up a property, then use real comps for the analysis (this allows you to share the resulting appraisal without redactions).
- Use high quality templates, branded for your firm, as product samples. This will give prospective clients an idea of the scope and style of your work.
Build and Execute a Marketing Campaign
Reach out to your current residential clients with personalized messages informing them of your expanded services. This could be through email, direct mail or phone. You may also have an opportunity to include service messages with report deliveries. Emphasize your established track record and experience in residential appraisal, and how it enriches your approach to commercial properties. Keep in mind that multiple messages are usually required before a prospect acts.
Update Your Website and Social Media
Update your website to reflect your new services in commercial appraisal. This should include detailed descriptions of your commercial appraisal services, testimonials and case studies, if available. Ensure that your website is optimized for search engines (SEO) to appear in searches related to commercial appraisals.
Get the word out on social media and update your profiles to reflect your commercial appraisal services. Blend your established credibility in residential appraisal with your growing expertise in commercial properties in your messaging.
Commercial work has many rewards and is a worthy career goal. It’s not easy, but it’s not rocket science. Be persistent, stay the course and enjoy the journey!
Where to Find Sample reports
I have prepared a mixed-use sample for download here. This “form-esq” template is highly streamlined and likely much shorter than what you will find through on-line searches, and perhaps more reflective of narrative trends toward more digestible reports for non-complex commercial and multifamily appraisals.
Public Domain Samples
Many appraisals performed for municipalities, counties and cities are in the public domain, and some appraisal firms provide downloadable samples. A word of caution here: you are likely to find very long reports — reports over 125 pages are not uncommon. These reports are an education in and of themselves and give some idea what loan officers and others have to digest in the course of a day’s work.
To find appraisals in the public domain, search Google for “commercial appraisal report filetype:pdf” and variations on this theme. Here’s another example: “commercial appraisal report short form narrative microsoft word filetype:pdf”.
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