Ultimate Guide to Rental Property Appraisals & Valuations

Last Updated: May 2024

Rental Property Appraisal and Valuation

Just because a rental property that is listed for sale with a $1 Million dollar price tag, doesn’t mean that it is worth that much. Additionally, just because you and the seller both agree that it is worth that much, does not guarantee that a lender will provide you a mortgage for that amount. The rental property appraisal and valuation process is a generally standardized procedure that provides common consensus through both quantitative and qualitative metrics on a property’s value. Below we take a comprehensive look at this process and the important role it plays in rental real estate finance.

What is a Real Estate Appraisal?

An appraisal (as it pertains to real estate) is a fair market estimation of a particular property’s value based on a series of quantitative factors such as comparable sales and current property condition. Appraisals are performed by a licensed appraiser or a real estate agent, and are typically required by lenders to ensure that the property is worth the amount being borrowed.

6 Types of Appraisals (Appraisal Methods)

There are several different methods that appraisers may use to arrive at an estimated value, each with its own strengths and weaknesses. The type of appraisal method(s) used will depend on the property being appraised, market location, and the purpose of the appraisal. For example, the Sales Comparison Approach is commonly used for single-family homes, while the Income Approach is often used for multifamily and commercial investment properties. We take a closer look at each type of appraisal method below.

Sales Comparison Approach

This method involves comparing the property being appraised to similar properties that have recently sold in the same area. The appraiser will make adjustments for any differences in the properties, such as size, condition, or location, in order to arrive at an estimated value.

Cost Approach

This method involves estimating the cost of replacing the property with a similar one, taking into account factors like depreciation and the current cost of labor and construction materials. The appraiser will also consider the land value and any improvements to the property, such as landscaping or a swimming pool.

Income Approach

This method is used to appraise commercial and investment properties, such as rental apartment buildings or commercial office buildings. The appraiser will estimate the property’s potential income based on its rental history or market rents, and then subtract any operating expenses, like property taxes or maintenance costs. The resulting net operating income is then capitalized to arrive at an estimated value.

Automated Valuation Models (AVMs)

This method uses statistical models and algorithms to estimate property values based on data from recent sales, property tax assessments, and other sources. AVMs are often used for low-cost, high-volume appraisals, such as for home equity loans or refinancing.

Broker Price Opinion

This method involves a rental real estate agent providing an estimated value for a property based on their knowledge of the local market and recent sales data. BPOs are often used for properties that are difficult to appraise, such as distressed or unusual properties.

Reconciliation Approach

This is not a method of appraisal per se, but rather a step in the appraisal process where the appraiser takes the estimates from the different approaches used and reconciles them into a final estimated value. The appraiser will consider the strengths and weaknesses of each approach and any other relevant factors to arrive at the most accurate value possible.

How Much Does a Rental Property Appraisals Cost?

Residential Properties

Commercial Properties

The cost of a rental real estate appraisal can vary depending on several factors, such as the type of property, the location, and the purpose of the appraisal. The average cost for a rental property appraisal in the United States is between $750 and $1,500, though it can be higher for more complex properties. Commercial appraisals are typically more expensive and typically start around $1,750 and scale up from there based on the property size. In addition to the type of property, the complexity of the appraisal assignment and the appraiser’s level of experience can also affect the cost. Appraisals for unique or high-end properties, for example, may require more research and analysis and can cost more than appraisals for more standard properties.

How Long Do Rental Property Appraisals Take to Complete?

Residential Properties

Commercial Properties

The time it takes to complete a rental real estate appraisal can vary depending on several factors, such as the type of property, the complexity of the assignment, and the workload of the appraiser. Generally, it takes around 5-10 days for a residential appraisal to be completed, including the time it takes to visit the property and complete the necessary research and analysis. Commercial property appraisals can take a little longer, ranging from 7-14 days depending on the property size.

The on-site inspection, where the appraiser visits the property and takes measurements, photos, and notes, typically takes a few hours. The appraiser will then analyze the data and research comparable properties before arriving at an estimated value. The completed report is typically delivered to the client within a few days after the inspection is completed.

However, for more complex or high-end properties, or in areas with high demand for appraisals, the appraisal and valuation process may take longer. In some cases, the appraiser may need to request additional information or documentation from the client, which can add to the timeline. It’s important for both buyers and sellers to understand the timeline for appraisals, as they are an essential step in the buying and selling process.

Why Pays for an Appraisal?

The party responsible for paying for an appraisal will depend on the specific circumstances of the transaction and any agreements made between the parties involved. The general rule is that an appraisal is typically paid by the party requesting it, such as a property buyer or the lender.

Buying & Selling

When buying or selling a property, the buyer or the buyer’s lender typically pays for it. This is because the buyer’s lender will usually request it as it is a requirement of the mortgage application process. Additionally, the lender wants to ensure that the property is worth the amount being borrowed and that there are no issues that could affect the property’s value.

Unique Properties

For unique or high-end properties, it is common for a seller to pay for an appraisal to ensure that they are asking a fair price. These properties typically come with large price tags or have a small pool of buyers, so it is a reasonable investment for a seller to get a third-party validation on price.

Refinance & HELOCs

When refinancing a property, or pulling out equity via HELOC or Cash Out Refinance, the borrower (property owner) will usually be the party paying for the appraisal. This ties into the general rule of the party requesting the appraisal is the one responsible for paying for it.

Commercial Real Estate Appraisals

Commercial real estate appraisals are a specialized component of buying, selling, and financing commercial properties. The process of appraising commercial properties is more complex than residential properties, and the appraisal report must comply with specific regulatory standards. Commercial appraisals typically involve a more detailed analysis of the property’s income potential, market trends, and other factors that can impact the value of the property.

Income Approach for Commercial Real Estate Appraisals

The Income Approach is often used in commercial appraisals to estimate the value of a property based on its potential to generate income, such as from rents or leases. The appraiser will also consider other factors, such as the location, physical condition of the property, and any unique characteristics that may affect its value.

Commercial Real Estate Appraisal Cost

The cost of a commercial appraisal can vary widely depending on the size, complexity, and location of the property. A typical commercial appraisal can cost several thousand dollars and can take several weeks to complete. It is important to choose an experienced and qualified appraiser who has a deep understanding of the local market and relevant regulations.

Calculating The Price of a Commercial Property

Commercial property valuations can be quickly estimated if you know a few data points about the property such as income, expenses, and cap rate. Try our commercial property valuation calculator to easily estimate and understand the approximate value of a commercial property based on its income and cap rate.

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Commercial Property Valuation Calculator Screenshot

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