Commercial Real Estate Appraisal and valuation service

A real estate appraisal is essential for determining the fair and accurate value of a property. It serves as a crucial tool in real estate transactions, providing reliable information about the current value of the asset to buyers, sellers, and lenders.

By establishing fair sale prices, it facilitates equitable negotiations and strengthens loan applicants’ positions by supporting the appropriate loan amount. Additionally, appraisals guide financial decisions, influence insurance premiums and tax assessments, and contribute to effective estate planning. In summary, a real estate appraisal provides clarity and confidence in various transactions and financial decisions.

Determining the cost of a real estate appraisal depends on various factors such as location, size, characteristics, and market conditions. Appraisers use comparison methods, cost approaches, and revenue analysis to determine an accurate value. The experience and knowledge of the appraiser are crucial in ensuring a fair and reliable appraisal that accurately reflects the current value of the property.

Appraisals are used when the price of a property that is desired to be put up for sale or rent is unknown, to determine its commercial price accurately and fairly for both owners and clients.

In addition to being a document to determine property value, it is used to ascertain the costs of deeds, taxes, notary fees in buying and selling processes, and to apply for mortgage loans or real estate insurance.

Appraisals are essential in legal operations such as:

• Property purchases and sales
• Processing bank mortgage loans or with institutions like Infonavit and FOVISSSTE
• During property title or testamentary proceedings
• Processing real estate insurance
• Determining rental property prices
• Calculating compensation for property expropriation
• Determining fiscal burdens such as Property Acquisition Tax (ISAI)

Appraisals are necessary to provide confidence and transparency to buyers. By determining the price, owners often rely on the emotional value of the property, which can result in setting it at either a very high or below its real value.

Having an appraisal provides a detailed, precise, and objective estimate of the property’s value. Moreover, as an official document, it can be presented to buyers or banking institutions to request financing.

Step 1: Problem Identification

Identify the use and purpose of the Valuation Service

Identify the date when the valuation is required

Identify the characteristics of the asset

Step 2: Determining the scope of work to address the valuation service

Once the problem has been identified, it is necessary to define the scope of work to be performed. The valuer must determine a sufficient scope to produce a valuation service with accurate and credible results.

It is the responsibility of the client, in conjunction with the national property appraiser, to define the scope of work in terms of delivery times, the extent of research and reporting, regulatory, technical, and theoretical substantiation, the quality of information, and other aspects to consider.

Once the scope of work is defined, the property appraiser must gather additional information as part of their professional appraisal duties.

Step 3: Information collection and property description

Information about the property to be appraised:

Geographical and geological characteristics of the land, size, shape, location, land use, type of construction, built area, effective age, state of conservation, construction elements, improvements to the property, ownership history, construction cost and depreciation information, income, and expense data, among others.

Market information for the area:

General characteristics of the region, city, neighborhood, and property location, among others.

Information on comparable real estate:

Completed sales, capitalization rates, conditions of closed transactions, sale prices, among others.

Step 4: Analysis of information

Market analysis

• Demand studies
• Absorption period
• Sale price
• Supply studies
• Volume of comparables in an open and competitive market
• Range of sale prices for comparables
• Market studies

Comprehensive analysis of markets according to supply and demand, as well as external and internal characteristics of the properties.

Highest and best use

• Land study
• It is the study that generates an analysis to determine if its best use is as it is currently, with improvements, or as land, without improvements.
• Different scenarios that are physically possible, legally permitted, financially viable, and provide maximum return are analyzed.

Step 5: Application of real estate valuation approaches

These valuation approaches are applicable to all types of commercial real estate. The three value indicators used in valuation are as follows:

Market Approach

The comparative market approach is a value indicator obtained from the analysis of the price of other assets similar to the asset under study. It is based on the principle of substitution.

Cost Approach

The cost approach is based on the principle of substitution, as it considers that an informed buyer will not pay more for an asset than the price of acquiring or reproducing an equally desirable substitute.

In this sense, in the case of real estate, the cost approach is obtained from the sum of the individual value of each of the components that make up the asset, namely, land, buildings, special facilities, complementary works and accessories, as well as other indirect, obsolescence and appreciation.

Income Approach

Through this approach, the value indicator based on the economic principle of anticipation is obtained, which indicates that any person is willing to pay for an asset an amount equivalent to the future benefits they will receive from said asset. This method uses the discounted cash flow process at the operational level or direct capitalization.

Discounted Cash Flow Method

Requires the construction of a financial model, in which, from the income and expenses (considering investments) from the market for each type of property and a discount rate properly supported and according to the characteristics of the asset, risk, financial costs, sector and administrative costs (identifying the number of periods in accordance with the type of property analyzed) and considering the operating income, the Net Present Value (NPV) corresponding to the property value is obtained, taking into account the reversion value at the end.

Step 6: Value reconciliation and final opinion

Conciliation is an analysis of the reliability and certainty of the real estate valuation approaches applied according to the quantity and quality of the information collected.

The commercial value of a conclusive real estate will be obtained considering those factors or particular conditions that influence its estimation, defining which of the approaches used is more representative derived from the quality of the information obtained, explaining the reasons why they are discarded or not used. This conclusive value should be rounded to reflect the degree of precision associated with the valuation, to avoid implying greater precision than required.

Step 7: Value opinion on land

The value of the land can be obtained by any of the following five procedures:

Considering the land without improvements. This method consists of direct market research of land for sale, whether offers or closures, and applying homogenization factors.

By the disaggregation procedure. It starts from the market research of similar properties for sale to which a static residual method is applied, and the value of the land is obtained.

Procedure for capitalizing land rent. Since land rent is a known amount and income can be capitalized on the value of the land.

Procedure for capitalizing land and construction income. When the land rent with construction is a known amount, income should be extracted exclusively from the land, and this can be capitalized on the value of the land.

When market information is insufficient, erratic or the characteristics of the property do not allow to affirm with certainty that the value obtained by the market approach is the most representative, it becomes necessary the use of the dynamic residual method (income approach) based on the best and highest use of the property.

The appraisal considers aspects such as the size of the property, its condition, current conditions, the area where it is located, built meters, total area, types of materials, age of construction, location, public services, access to transportation, among others that determine the quality of life and property value appreciation.

Performing an appraisal is a process that takes between 15 and 20 business days, depending on the type of property to be appraised.

A Valuation Report or Conclusive Report is delivered. The content of this report must be consistent and must contain at least the following:

• Specify the client and potential users, by name or type.
• Identify the characteristics of the goods that are relevant to their type and to the definition of value.
• Its location and its physical, legal, and economic attributes.
• The rights of the asset to be appraised.
• Any personal property, commercial accessories, intangible items that are not real estate but are included in the valuation.
• Any easement, restriction, lien, loans, legal reserve, agreements, contracts, declarations, any specific regulations, or other similar arrangements.
• Specify the date of the value of the assets reflected in the valuation service.
• Mention if the asset in question is partially valued in its rights, is physically segmented or partial possession.
• The valuer must verify the accuracy of the data provided by the client.
• Clearly and visibly indicate all extraordinary assumptions and hypothetical conditions; as well as indicate that its use could have affected the results of the valuation service.
• Include a signed certification as indicated in international valuation standards.

• Property deeds and title
• Property and water payment receipts
• CFE vouchers
• Property location
• Property plans

If you require a real estate appraisal and would like CREA’s assistance, write to us using the contact form where we will gladly advise you.

There are different types of appraisals classified according to their purpose. These are:

Fiscal Appraisal

The fiscal appraisal is an assessment conducted by the municipality or a federal authority (such as the SAT) for non-commercial purposes on a property or real estate to assign corresponding fiscal burdens: Income Tax (ISR) and Property Acquisition Tax (ISAI). Among fiscal appraisals, we can find 3 subtypes:

• Appraisals to determine tax deduction for improvements
• Appraisal for property acquisition
• Cadastral appraisal

Why is a fiscal appraisal required?

Fiscal appraisals are specifically carried out for tax matters, such as setting territorial taxes, but they do not affect commercial value. However, this appraisal must be considered to determine ISR and ISAI upon acquisition, adjudication, or change of property ownership.

A fiscal appraisal must also be conducted when investing in property for improvements and expansions, as the cost of investments must be calculated.

When should a fiscal appraisal be done? A fiscal appraisal should be done when transferring ownership for ISAI and ISR purposes, such as in cases of:

• Purchase and sale
• Testamentary proceedings
• Adjudications
• Mergers or divisions of property
• Establishing condominium ownership for the property

Price and Validity

The price of a fiscal appraisal depends on the property value. It is calculated between 2.5% and 3.5% of the total value. For example, on a property valued at one million pesos, the appraisal will cost approximately three thousand pesos. Regarding validity, according to Article 3 of the Regulations of the Federal Fiscal Code, fiscal appraisals are valid for one year from the date of issuance.

Bank Appraisal

A bank appraisal is a procedure for requesting a mortgage-backed loan used to acquire property, or to pledge the property for a loan.

Why is a bank appraisal required?

A bank appraisal is used as technical and legal support to determine the amount of financing or the guarantee that will be provided for loans involving:

• Real estate (houses, apartments, land)
• Industrial premises
• Residential or office buildings
• Commercial premises
• Shopping centers
• Furniture and/or equipment
• Vehicles
• Production lands

Which documents are required?

For a bank appraisal, the following documents are required:

• Property information
• Construction area in square meters (m2)
• Total land area in square meters (m2)
• Cadastral value recorded in the latest property tax receipt
• Copy of the property deeds
• Copy of the building plans or sketches
• Copy of the latest property tax and water bills

Price and Validity

Bank appraisals have a maximum validity of six months from the date of issuance. Their cost varies depending on the size and value of the property, and each bank has established fees.

Mortgage Appraisals

Mortgage appraisals are conducted to determine the value of a property before renting or selling it, or to apply for credits or mortgages with mortgage guarantees.

What information should it contain?

The mortgage appraisal contains technical information about the property such as its characteristics, land, nearby properties, occupancy status, whether it is abandoned or invaded, and its registration in the Public Property Registry, among other details.

To conduct a mortgage appraisal, the following are required:

• Property deeds or title
• Proof of address
• Latest property tax, electricity, and water bills
• Architectural plans

Commercial Appraisals

Commercial appraisals are used to determine the value of premises, buildings, shopping centers, and other properties to establish purchase, sale, or other commercial transaction prices.

Why is it required?

This type of appraisal is carried out to assess the state of conservation and maintenance of the property, the quality of construction materials, access to communication routes, street conditions, public transportation services, among other factors.

Validity and Price

The validity of a commercial appraisal ranges from six months to one year. The duration of validity, as well as the price of the appraisal, depend on economic movements, supply-demand dynamics, and the type of property.

What is the validity of a real estate appraisal?

Depending on the type of appraisal, it can be valid for between six months and one year from the date of issuance, if there have been no changes in the physical characteristics of the property or in the real estate market conditions.

Who can perform it?

An appraisal must be conducted by an experienced, impartial specialist with no conflict of interest.

At CREA Soluciones, we have the experts you need to make the most profitable decisions with your assets.