Commercial Origination Opportunities and the Appraisals Required
By Charlie Elliott, MAI, SRA

We have all heard that “timing is everything.” This sage wisdom has its place in mortgage lending, a place where each day brings a new dawn. While I do not know who coined the phrase, and cannot give credit for their insight, note that I do place this phrase in quotes in much the same way I would have listed a quote from say, Thomas Jefferson or Mark Twain because it has as much significance as anything I remember these men being credited for saying.

Remember just two or three years ago when your days were spent simply trying to process all of that residential business that came your way? Furthermore, it came our way with little effort, in many cases. Oh, how quick things can change and oh how, they have! Although many have complained about the recent slowdown in residential loan applications, please note that the phrase “timing is everything” within itself carries no negative implications. To me this phrase carries a very positive and optimistic characteristic. Yes, it addresses the potential loss of business, which we oftentimes are not prepared for, however, more important, it addresses the potential for the future. It addresses all those opportunities that are lying in wait, just for someone to take advantage of.

Now enters the commercial loan opportunity. I attended a banking convention recently in Las Vegas and there was much near-term optimism for the commercial lending markets and little for residential. Our company, which offers both residential and commercial appraisals, has experienced a surge in the commercial business at a time when the residential market is very soft. During the past decade while the residential market was heating up, the commercial market has been in doldrums. If you believe that “timing is everything,” the time has come for the commercial market to shine.

The commercial property that we address here, we address in a broad sense. While some may have the sphere of influence to attract business from the owners of large shopping centers or strip malls, not everyone will find such business within their reach. Here we address the commercial loan opportunity as one that does not fit the mold of the typical single family home, yet it may be one of the many thousands of properties that are located within our market area, offering many business opportunities. These properties may be vacant land, subdivisions, farms, day care centers, places of worship, owner occupied business properties, as well as small and large office, retail and industrial real estate.

These properties may not fit the mold of all lenders. Thanks to the broad range of banks and mortgage companies offering financing today and the loose knit arrangement many loan originators have with a variety of different entities that make and or purchase loans, opportunities for funding these loans are more available than ever. What is a better time to diversify a bit and try something different, a road less traveled if you will? It is sufficient to say that there are many commercial loan opportunities out there and many of them carry monetary rewards that far exceed those of the typical bread-and-butter home. Loan amounts can be in the millions and, due their uniqueness, loan origination requires additional work and carries the compensation associated with it.

Since this is an appraisal column and even though I am primarily a marketer at heart, some discussion on the appraisal process for commercial properties is in order here. Commercial appraisals usually require a general certified appraiser. The commercial appraisal is much less regulated. There are many formats in which they can be prepared and there is more latitude in the “scope of work” for the appraisal. If you are not, please get familiar with this term. It is the buzz term for appraisals in the current environment. It is defined by my appraisal dictionary, The Dictionary of Real Estate Appraisal, as follows: “scope of work – The amount and type of information researched and the analysis applied in an assignment.” For the most part Fannie Mae or Freddie Mac decide the “scope of work” in a residential appraisal by providing the forms that they require and the guidelines for completing the appraisal. For commercial appraisals this is not true. The commercial appraiser is required to follow Uniform Standards of Professional Appraisal Practice, but he or she is given much more latitude in completing the report and complying with the standards. One would not approach the appraisal of a vineyard or horse farm in the same way as he or she would a single-family residence.

Commercial appraisals usually take the format of either a commercial appraisal form or a narrative. This can be determined by the client or the appraiser. As appraisers, we find that the more sophisticated the underwriter the more involved in the process they become. Said another way, if the underwriter does not know a lot about the different formats available, it is usually left to the appraiser to determine the format.

When forms are used, there are usually two up for consideration. There is a form for large property, the FNMA 1050/FHMLC 71A, which has about 14 pages. For small property there is the FNMA 1075/FHMLC 71B, which has about eight pages. Most appraisers usually prefer the small property form, regardless of the size of the project, because it is simpler, easier and quicker to prepare.

In the case of the narrative, the appraiser usually has a lot of flexibility. This is the format that is written in paragraph form and looks much like the way a book would be written. It can be very comprehensive and very specific. This format works best when performed by a seasoned appraiser familiar with all of the possible avenues available in appraising. It would fall into the category of “don’t try this at home,” in that if the appraiser is not a true professional the results can be misleading.

Whether your appraiser is required or chooses to use the form or narrative format, the same approaches to value the Cost Approach, Sales Comparison and the Income Approach are available to him or her and must be considered as approaches for a given appraisal.

In summary “timing is everything.” If things are a bit slow and if commercial lending seems like something you could benefit from, you may very well find it to be one of the arrows in your quill of products. Commercial appraisals should only be performed by those with a true understanding of the discipline. With complex properties, the appraiser should either select the format or be consulted in that there is much more to be considered in a commercial appraisal than that of a residential appraisal.