The next time you purchase a new property, a new rule may apply that impacts your need for a commercial real estate appraisal. The new rule comes from the agencies that regulate all FDIC-supervised banking institutions. Essentially, under the change to federal rules, many commercial real estate properties will now be exempt from the need for a certified third-party appraisal during the sale and loan transaction process. On April 14, 2018, the newly amended rule called “Real Estate Appraisals” was filed. The new rule doubled the appraisal threshold for all real estate-related transactions. The new threshold for properties is now $500,000.
Here’s what the FDIC says about the change in its April 2nd Financial Institution Letter:
“The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal requirements.”
New Category for Commercial Real Estate Appraisals
By creating a separate category for commercial real estate transactions, the law exempts more than 15% of real estate transactions. It does this by allowing lenders to finance properties sold at $500,000 or less without requiring commercial real estate appraisals. Lenders must still evaluate the property’s value. However, this rule should make smaller real estate transactions easier, faster, and less costly. With average appraisal costs close to $3,000 per transaction, this represents significant savings to borrowers, especially small businesses.
Sign Up to receive our newsletter, product updates, and discounts!
We hate spam too. You can unsubscribe at anytime.
Commercial Real Estate Appraisal Lender Requirements
The Federal Reserve Board (the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (the Agencies) signed off on the new rule. The purpose of the change was to reduce burdensome banking requirements. Qualifying business loans must be less than $1,000,000 and not rely on rental income or sale of the property as the primary source of repayment for the loan secured by the commercial real estate. As you would expect, financial institutions are still required to document a reasonable and appropriate evaluation of the property. To do this, they must use sound banking practices. However, the evaluation can be performed by someone other than a certified or licensed appraiser.
Documentation for Commercial Real Estate Appraisal Under $500,000
With this change, business owners may be able to get financing more quickly. Now, bankers can underwrite loans for these properties for properties valued at under $500,000. And, now they can save the time and expense of contracting a formal appraisal. However, borrowers must still provide the same type of documentation and factual data to the lender that would have previously been shared with a third-party appraiser. Typically, the data required includes:
- Purpose of the loan
- Intended use of the property
- Building drawings and photos
- Leases and rent rolls
- Property expense and cash flow information
- Financials and tax statements
- Other information pertinent to the transaction
$500,000 Commercial Real Estate Appraisals Threshold Overview
The new $500,000 commercial real estate appraisal threshold could prove to be a major benefit for many business owners and lenders. Above all, the rule loosens restrictions on financing smaller commercial real estate loans. Instead, financial institutions may now complete internal property evaluations up to that threshold. The change effectively eliminates the need for contracting third parties for smaller transactions. Eliminating the formal appraisals has the potential to save thousands of dollars on each transaction. Additionally, the change reduces the time your lender needs to complete an internal commercial real estate evaluation and approve your loan. At the end of the day, who doesn’t like that?
Finally, if you liked this blog, please share it with a friend. Also, if you want to receive regular articles to help with your asset management, subscribe here.
Are you looking for a simple way to slice and dice your real estate data?
We can show you how.
What else do you want to know about?
Thank you for your visit.
Latest posts by Jeri Frank (see all)
- New $500,000 Threshold on Commercial Real Estate Appraisals - July 3, 2018
- How to Set Up a Chart of Accounts for a Real Estate Company in QBO - April 22, 2018
- What Real Estate Investors Can Learn from Warren Buffett - February 1, 2018
Also published on Medium.