Commercial Evaluation, or Commercial Appraisal?

Tucker, Michael mtucker@mba.org

September 21, 2016


Between a changing regulatory environment and an appraiser shortage, commercial lenders might need to consider viable alternatives to traditional commercial appraisals when appropriate.

Commercial evaluations are not yet household names within the industry, but Audrey Clearwater, vice president of operations with LRES, Orange, Calif., says they should be.

MBA NewsLink recently posed questions to Clearwater. LRES is a national real estate services company providing valuations, REO asset management, HOA and technology services to the mortgage and real estate industry. 

MBA NEWSLINK: What is the difference between a commercial evaluation and a commercial appraisal?

AUDREY CLEARWATER, LRES: Commercial evaluations are performed by brokers or field agents, whereas commercial appraisals are performed by appraisers. 

These professionals follow different guidelines to procure values. Commercial evaluations comply with the Interagency Appraisal and Evaluation Guideline, which are ground rules for federally regulated institutions on proper policies, procedures and practices as they relate to value conclusions outlined in a 45-page document released by the FDIC. Traditional commercial appraisals follow the Uniform Standards of Professional Appraisal Practice, the ethical and performance standards for all types of appraisal services released by Congress. 

While the processes behind generating property values are very similar and the valuation reports for both evaluations and appraisals look fairly identical, there are distinct circumstances when lenders should consider doing one over the other.

NEWSLINK: So when does it make the most sense for lenders to consider using a commercial evaluation as opposed to a traditional appraisal?

CLEARWATER: Evaluations utilize market value versus price. Lenders can use evaluations for origination purposes when valuing a commercial property under $1 million. This means that commercial evaluations are reliable, cost-effective alternatives to procuring values for low-balance properties, while traditional appraisals are still the most appropriate option to obtain values for complex, high-dollar properties. 

While evaluations are viable options to use for origination purposes when appropriate, they are more commonly used for portfolio monitoring, due diligence, loan modifications, default services and extensions of credit. They can also be used whenever a lending institution needs to verify a purchase price when a property is under contract to be purchased.

NEWSLINK: What are some of the benefits to using a commercial evaluation?

CLEARWATER: Commercial evaluations offer a lower-cost alternative valuation and can save lenders thousands of dollars when compared to traditional commercial appraisals, without sacrificing accuracy and report quality. Commercial appraisals can cost anywhere from $4,000 to $10,000, whereas an evaluation costs under $1,000. 

Also, commercial evaluations offer faster turn-time solutions. An appraisal can take several weeks to complete, whereas the average turn-time for an evaluation is less than 10 business days.  Lenders can also have peace of mind knowing just how much effort and detail goes into producing commercial evaluation reports. The commercial evaluation contains several approaches to value, including a comparable analysis, income approach and land values. A typical report contains three comparable rentals; three comparable listings; three comparable sales; line-item adjustments; local market trends including vacancy rates and the subject's neighborhood; subject property transaction history; income approach, capitalization rate; operating expenses; current subject photos; and in-depth commentary. 

Field agents also perform interior and exterior site inspections. The reports address current zoning, construction quality, site utility, assessment information and highest and best use. 

Professional appraisal-management companies and evaluation providers incorporate a two-tier quality assurance approach, coupling highly thorough manual review practices by industry veterans (many of whom are former appraisers with several years of experience) with automated technology. This optimizes valuation order processing through consistency, quality control and built-in compliance processes. 

Valuation technology also creates consistency and accuracy to an otherwise complex process. This is especially valuable since commercial lenders work with several field agents assisting in fulfilling the orders of various property types, including multifamily, hospitality, industrial and retail.

NEWSLINK: Why aren't commercial evaluations better known in the industry?

CLEARWATER: Commercial evaluations are relatively new products, introduced to the industry in late 2010, so they have not been around nearly as long as their appraisal counterparts. But we are starting to see lenders using evaluations more and more for their valuation needs. 

Lenders are attracted to the quicker turn-time and cost savings associated with commercial evaluations. As I mentioned, there are a number of cases when it is in the lenders' best interest to use evaluations as opposed to appraisals, and more lenders should be aware of them as an option. 

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Michael Tucker at mtucker@mba.org.)

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