Too often, lenders accept third-party appraisals at face value—reviewed for completeness, filed away, and rarely questioned. But an appraisal is not a purely scientific document. It blends objective data with professional judgment, assumptions, and interpretation.
That doesn’t make appraisals unreliable. It does mean lenders must apply independent rigor.
This article focuses primarily on non-owner-occupied commercial real estate (NOORE), though the concepts apply broadly across property types.
Why Do We Care?
Appraisers are essential partners and appraisals are a regulatory requirement. But valuation is not an exact science. Two qualified appraisers can look at the same property and arrive at different values based on assumptions around:
Income sustainability
Expenses
Market conditions
Capitalization rates
Occupancy and lease-up timing
From a credit perspective, collateral value matters because it represents the main secondary source of repayment. If the value is overstated, the creditor may be exposed to more risk than intended. If understated, a sound transaction may never get off the ground.
A strong appraisal review process protects both the lender and the borrower.
The Three Appraisal Valuation Approaches
Commercial real estate appraisals typically rely on one or more of the following approaches. Not every approach is appropriate in every situation, and appraisers should explain why.
1. Cost Approach
The cost approach estimates what it would cost to acquire the land and construct the subject property today, using current materials, labor, and timelines. This approach is most relevant for newer or specialized properties.
While conceptually straightforward, it can become less reliable for older properties due to depreciation assumptions and functional obsolescence.
2. Sales Comparison Approach
This approach analyzes recent sales of comparable properties, adjusting for differences in size, condition, location, and features.
Challenges arise when:
Comparable sales are limited
Properties are highly specialized
Markets are thin or smaller
In those cases, appraisers may expand the geographic range or timeframe of comps, introducing additional subjectivity.
3. Income Approach
For income-producing CRE, this is often the most heavily weighted approach.
The appraiser:
Calculates Net Operating Income (NOI) using actual or market-based rents and expenses
Applies a capitalization rate to estimate value
Because it relies on assumptions about future performance, this approach requires careful scrutiny, especially cap rates, expense ratios, and vacancy assumptions.
Reconciling the Values
Once the applicable approaches are completed, the appraiser reconciles them into a single market value. This reconciliation process is where professional judgment plays the largest role.
Lenders should understand why one approach was weighted more heavily than another, and whether that rationale aligns with their own risk perspective.
As-Is, As-Complete, and As-Stabilized Values
Depending on the transaction, an appraisal may include multiple valuation scenarios.
As-Is Value (Required)
Regulators require an as-is value: the market value of the property in its current condition, with existing tenants, leases, and physical attributes.
This value anchors the appraisal in today’s reality.
As-Complete Value
Used for construction or renovation projects, this value estimates what the property will be worth once construction is complete, assuming it is built according to approved plans and specifications.
Because lenders are often funding the construction, this value helps assess collateral coverage at full funding. Best practices include requiring an appraisal recertification upon completion of construction to confirm the project was delivered as planned.
As-Stabilized Value
Often the most subjective, the as-stabilized value assumes:
Construction or renovation is complete
The property is leased to market occupancy
Rents and expenses reflect stabilized market levels
This valuation is inherently forward-looking and speculative. Lease-up timelines, market shifts, and economic changes can materially affect outcomes. Conservative interpretation is critical.
What Should Lenders Do?
Lending institutions should maintain a robust appraisal review process while preserving required independence.
Key best practices include:
Assign appraisal reviews to Loan Review, Credit, CRE teams, or an independent lender not involved in the transaction
Focus reviews on assumptions, not just math
Scrutinize:
Cap rates
Expense assumptions
Occupancy and lease-up projections
Ask clarifying questions and document responses
Maintain written records of reviewer-appraiser interactions
It is acceptable, and expected, for banks and credit unions to question appraisals. Appraisers may not revise their conclusions, but the dialogue itself strengthens the credit file and demonstrates discipline.
Approved Appraiser Lists Matter
Lending institutions should maintain and actively manage a list of approved appraisers:
Vet credentials and experience
Monitor report quality and timeliness
Add new qualified appraisers as needed
Remove underperforming vendors
This should be a living document, not a static policy artifact.
Final Thought
Lenders should never outsource underwriting judgment, including collateral analysis.
Appraisals are critical tools, but they are not absolutes. Applying thoughtful review, asking good questions, and documenting the process ensures collateral values truly support sound credit decisions.
That’s how lenders protect capital, support borrowers, and satisfy regulators, without relying on blind acceptance.
