When determining value of a commercial property, know the different methods available of how to value commercial property properly. 

Q: Our bank came in with an appraised value that is about one-third of what we originally borrowed from the bank in 2006. Our loan is coming due (we had a balloon loan) and we need to know the best way to find a qualified independent commercial real estate appraiser to see if we can get a different appraisal than what the bank appraiser came up with.

A: The operative word in your question is that you are looking for a “commercial” and not a “residential” real estate appraiser. So, we’re assuming that the property in question is a commercial property of some type, rather than a single family house, condo or townhome that you live in or rent out.

Let’s start at the top: You have to separate what you borrowed from what your commercial or investment property is worth today – a considerable difference. But there are several ways to value commercial property, so perhaps the property based on one of these methods of valuation.

We’d like to think that the property you own is income producing. If you have tenants in the property, those tenants should be paying you rent. If they do, that income stream is one method appraisers use to determine the value of a commercial property.

Another method of determining the value for a commercial property is to see what it would cost to replace the building. If the cost to replace a warehouse, strip center, or an office building is $500,000, that number may affect the value of the property from the lender’s perspective.

Finally, you also have to consider what other similar types of properties are selling for in your general area. An appraiser will look at all of these elements and come up with an appraised value for your commercial property.

However, if you’ve lost most of your tenants, the value of your property using the income method –that is the income that you receive from tenants – will be quite low. If other properties in the area are selling at depressed levels, the appraisal based on comparative properties will also be quite low. The only method that could yield a higher appraisal might be what it would cost to rebuild your property.

But these and other elements that an appraiser looks at go into determining the value of your property. You have to ask yourself how other properties like yours are valued in your area. You also have to have an idea of the income and expenses you have on your property. If you know these facts, you can get a better idea of what to expect from an appraisal. It may be that the initial appraisal is on the mark and paying for another one won’t help you much.

On the other hand, if you know that your property generates positive income and you have a good idea of real estate values in your area, you may believe that the current appraisal the bank received is way off. You then need to have a conversation with your commercial lender about the appraisal and give the bank more information about your property. This lender should then decide to have the same appraiser reevaluate your property or hire a second appraiser to give another opinion.

Now, if you insist on getting an appraisal yourself, you can talk to other commercial mortgage brokers in your area to get recommendations. You can find them through appraisal trade organizations such as the Appraisal Institute and you may also find them by talking to commercial real estate brokers in your area.

But keep in mind that the bank is not obligated to use your appraisal, and while you have the satisfaction of knowing that your appraiser gave your property a higher value, it won’t help you land a refinance.