A loan officer asks for “an appraisal or an evaluation, depending on the amount.” The owner nods and wonders what the difference is, and whether it matters who prepares it.
It matters. The two documents answer the same question, what the property is worth, under different rules and for different users. This article explains both, says when each is required, and says plainly where Clover State fits and where it does not.
Two documents, one question
An appraisal is a licensed or certified appraiser’s opinion of market value. It is prepared under the Uniform Standards of Professional Appraisal Practice, known as USPAP, and the appraiser’s state credential stands behind it.
An evaluation is an estimate of market value that a financial institution may use for smaller commercial real estate transactions. It does not have to follow USPAP, and it does not have to be completed by a state licensed or certified appraiser.
Both should reach a supported number. The difference is the standard each one is held to and who may sign it.
| Appraisal | Evaluation | |
|---|---|---|
| Standard | USPAP | Does not have to follow USPAP |
| Who prepares it | A state licensed or certified appraiser | Does not have to be a licensed or certified appraiser |
| When a lender uses it | Above the federal threshold, or when its policy requires | Below the threshold, if its policy allows |
| Who else relies on it | Courts, estates, contracts that name it | Mainly the lender, for its loan file |
| Clover State’s role | We coordinate a licensed appraiser | We can prepare valuation work for the lender |
The table is a summary, not a rule book. The lender’s policy, the court or the contract always has the last word on which document it will accept.
The federal threshold, stated plainly
In 2018 the Federal Reserve, the FDIC and the OCC raised the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $500,000. Below that threshold, a financial institution may use an evaluation rather than an appraisal.
Three practical points follow:
- The rule is the lender’s. It governs what a bank or credit union may use for its own loan file. It does not tell an owner what to order for any other purpose.
- “May” is not “must.” A lender can still ask for an appraisal below the threshold. Its own policy decides.
- Ask how your transaction is measured. How the lender measures a transaction against the threshold, and whether any exemption applies, is the lender’s call. Ask the loan officer early.
When a licensed appraisal is required
Clover State does not provide appraisals. No one at Clover State signs as an appraiser or claims an appraisal credential. That is worth saying first, because the rest of this section is about when you need someone who does.
A licensed appraisal is the right document when:
- A bank loan sits above the federal threshold, unless the lender tells you an exemption applies
- The lender’s own policy calls for one, at any amount
- A court will rely on the number, as in a divorce, a partnership dispute or other litigation
- An estate matter calls for one; your estate attorney or CPA will say whether yours does
- A contract with a buyer, partner or investor names an appraisal as the standard
In each case, the people relying on the number set the standard, and an opinion of value from anyone else will not replace it. On a scoping call we will tell you if your question looks like one of these. If it does, we can scope the question and coordinate a licensed appraiser so the right person does the work.
When an evaluation will do
Below the threshold, a lender may use an evaluation instead, if its policy allows. For a community bank or credit union, that is a way to support a smaller commercial loan with a documented, independent value without commissioning an appraisal it is not required to order.
Clover State prepares valuation work for community lenders on these loans. We are independent of the borrower and the loan officer, and the report is written for the lender’s file. Whether a given evaluation meets the lender’s policy, or satisfies its examiners, is the lender’s judgment, and we make no promise on either. Our page for community lenders needing evaluations explains how that work is scoped.
A worked example
The numbers here are illustrative. Say three owners in Casper each have a question about a commercial building.
The first owner wants to refinance a 7,500 square foot retail building with a $420,000 loan from a local bank. The building’s net operating income, after vacancy and expenses, is $51,200. Local sales support an 8.0% cap rate:
$51,200 ÷ 0.080 = $640,000
$420,000 ÷ $640,000 = 65.6% loan to value
The transaction is below the $500,000 threshold, so the bank may use an evaluation if its policy allows. The bank decides which it wants and how it will be ordered.
The second owner wants to borrow $780,000 against a 16,000 square foot flex building. That transaction is above the threshold. Unless the lender says an exemption applies, it will need a licensed appraisal, and the lender will explain how it orders one.
An independent opinion of value cannot replace that appraisal. It can still help the owner decide whether the loan is worth pursuing before paying for one, for example by showing that the loan to value works at a realistic cap rate.
The third owner has no loan at all. The question is whether to sell a 10,000 square foot office building or renew its two tenants first. No lender is relying on the number, so neither federal rule applies and neither document is required. An independent opinion of value, with the math and a recommendation, answers the owner’s question.
What a sound evaluation shows
Each lender sets its own expectations for an evaluation, usually in a written policy. Read that policy first. Beyond it, a useful evaluation will show:
- The property identified, with its size, use and condition
- Whether it was inspected, when and by whom
- The approach used to reach value, and why it fits this property
- Income and expense detail tied to the rent roll and the operating statements
- Comparable sales or rents, with each adjustment explained
- A single market value conclusion with an effective date
- A statement of the preparer’s independence from the borrower and the loan
If a term on that list is unfamiliar, our glossary of valuation and lease terms defines evaluation, appraisal, cap rate and the rest in a sentence each.
Questions to ask your lender first
Before anyone orders anything, a short call with the loan officer settles most of it:
- Under your policy, does this transaction need an appraisal or an evaluation?
- Who orders it, and who pays for it?
- Do you keep a list of approved preparers?
- Does it need a site inspection, or will a desktop review do?
- What effective date do you need?
- How long will your own review take once it arrives?
The answers decide the document, the preparer and the timeline. They take a short call to get, and they keep anyone from ordering the wrong document.
Owners without a loan
Most owner decisions sit outside both rules: renewing a tenant, contesting a Wyoming assessment, planning a sale, settling a family holding. None of them needs an appraisal unless a court, a contract, your attorney or your CPA says otherwise.
What they need is a number the owner can trust and act on. A valuation advisory report is a full consulting report, not an appraisal: a site visit, the approaches that fit, a sensitivity table and a written recommendation, in 10 to 15 business days from $3,500 per property (indicative).
When the question is narrower, our property valuation service also offers a desktop snapshot in 5 business days from complete documents.
A quick way to sort it
If a lender will rely on the number, ask the lender. If a court or an estate will rely on it, ask your attorney or CPA. If only you will rely on it, you need neither an appraisal nor an evaluation, just a number with its reasoning shown.
The next step
If you are not sure which document your situation needs, that is what the free 30-minute scoping call is for. We will say whether your question calls for a licensed appraisal, an evaluation for your lender or an opinion of value for your own decision. If it is the first, we will scope the question and coordinate a licensed appraiser rather than sell you something else.
