Certain commercial properties don’t require a traditional appraisal, and an evaluation is an attractive and cost-effective alternative for those assets. Financial institutions of all types have an opportunity to take advantage of evaluations when valuing real estate in connection with lending transactions. Compared with an appraisal, evaluations are streamlined, take less time to develop and cost less.
But when are evaluations a prudent choice for financial institutions?
First, qualifications must be met. Under federal regulations, institutions may obtain an evaluation of real property collateral in lieu of an appraisal for certain transaction types:
- Commercial real estate-related financial transactions in which the transaction value (generally the loan amount) is $500,000 or less.
- Certain renewals, refinances or other transactions involving existing extensions of credit, provided there has been no material change in the market conditions affecting the real property’s adequacy as collateral and there is no advancement of new money other than funds necessary to cover closing costs.
- Real estate-secured business loans of $1 million or less in which rental income from the property or income from the sale of the property is not the primary source of repayment for the loan.
Besides meeting eligibility requirements for an evaluation, there are conditions that might warrant the use of an evaluation. When loans are nearing renewal, it’s often the case that a financial institution is familiar with a property and doesn’t need a dense report but rather a means of ensuring through unbiased, third-party assessment that an asset’s market value is in line with the institution’s underwriting.
BBG understands that saving time and money is a critical consideration in the current market. That’s why BBG Evaluation has been making the valuation process more efficient while maintaining the integrity of the product. Strictly speaking, the federal requirements for completing an appraisal, as laid out by the Uniform Standards of Professional Appraisal Practice (USPAP), do not extend to an evaluation. However, BBG Evaluation reports are all USPAP-compliant.
Federal guidelines recommend that financial institutions have a program for valuing real property to ensure they are engaged in real estate-related lending in a safe and sound manner. “When a loan qualifies for an evaluation report, there’s still a choice—get an evaluation or get an appraisal. One or the other is required,” says Paul E. Ping, MAI, who was hired this month as Senior Managing Director responsible for expanding BBG Evaluation. “For an evaluation, our typical turnaround time is 10 business days for an evaluation and it is about a third of the cost of an appraisal.”
But that doesn’t mean an evaluation is always the best option. Just because an evaluation is permissible does not make it a prudent choice—for example, when dealing with an atypical or complex property, or when higher-risk financial transactions are in play. “Some property types present unique challenges that wouldn’t be appropriate for evaluations,” Ping says.
Completed by certified appraisers, BBG’s robust, USPAP-compliant appraisals are our bread and butter. There’s real growth potential with evaluations. Today, a significant number of the nation’s top financial institutions use BBG Evaluation reports for qualifying lending transactions. BBG expects that number to grow because every day financial institutions of all types engage in the kinds of transactions for which evaluations are the efficient choice.