INSIGHT

Real estate appraisal vs. fair value analysis — and how to comply with ASC 820

Kemp Moyer • May 22, 2025

Industries: Real Estate

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Formal appraisals take time and money. A fair value analysis may give portfolio companies a speedier and more cost-efficient alternative for meeting reporting requirements.

The challenge of valuing real estate portfolios

Your real estate portfolio company manages multiple properties that may be concentrated in one region or spread across various global locations. Determining accurate and up-to-date fair values across your portfolio presents significant challenges. While formal appraisals may be required for certain financial reporting purposes or deeply ingrained in company processes, many investment companies with GAAP reporting requirements can benefit from a streamlined fair value assessment process that saves both time and resources.

This article will explore the differences between traditional appraisals and fair value analyses, helping you determine which approach best serves your business needs.

Understanding the difference between appraisals and valuations

Traditional property appraisals typically rely on a combination of the three common approaches to value:

• Market comparison (Comparable sales analysis): This approach develops a valuation by analyzing similar properties recently sold in the same neighborhood to establish an estimated price.
• Income/investment: This approach estimates value by either a applying a captilization rate to current or potential net operating income or by modeling potential cash flow a property generates or could potentially generate in the future and discounting future returns.
• Replacement cost (Cost approach): This approach estimates value by valuing the land of the property, applying per unit costs to improve the site with identical replacement building and applying depreciation to the improvements.

Appraisers select their method based on how the market and potential participants would analyze a property in conjunction with data availability, property quality, location and property type. These formal appraisals become necessary when securing financing, complying with regulatory requirements, appealing tax assessments, filing estate tax returns, gifting property, conducting business mergers or acquiring insurance coverage. Federal regulations mandate formal appraisals for all real estate transactions valued above $500,000.

However, not every situation demands a formal appraisal. Under Accounting Standards Codification (ASC) 820, your portfolio company can often use simplified fair value analyses that prove less expensive, more time-efficient and more easily repeatable for regular reporting needs.

How fair value analyses work

A fair value analysis determines the estimated value of an asset if sold in an open market without selling pressure. While similar to fair-market value, this approach has key differences in application.

Valuation specialists examine several factors when calculating fair value for real estate:

• Property location
• Square footage
• Purchase transaction history
• Sales of comparable properties
• Current market data trends
• Historical and potential income and expenses

These valuations often include income-based analyses to determine investment profitability based on actual or projected future income. While many processes mirror traditional appraisal methods, the procedures are streamlined and highly repeatable once established, with only incremental updates to key metrics needed for subsequent valuations.

Unlike formal appraisals that require in-depth property visits each time they’re completed, fair value analyses focus on market adjustments based on changing circumstances since the initial property purchase or prior analysis. This approach allows companies to develop formalized procedures that create a more efficient audit completion process once agreed upon with the firm providing assurance functions.

Adapting to market changes

Quality fair value analysis processes incorporate proper market adjustments based on changing conditions. Consider the impact of the COVID-19 pandemic on commercial real estate: with many retailers, offices and restaurants forced to close or forego rent payments during lockdowns, commercial property values were significantly depressed in various markets.

Rather than requiring comprehensive onsite appraisal updates, fair value specialists can utilize market indicators and data analytics to adjust fair value analyses across entire portfolios of similar properties. This approach often proves more efficient than granular appraisal processes while still capturing meaningful market shifts.

Choosing the right approach for your business

Developing a fundamental valuation approach offers clear benefits for portfolio companies with recurring reporting requirements. The process works more efficiently and generally costs less than formal appraisals while still meeting GAAP reporting requirements.

Certain circumstances will still necessitate formal appraisals, such as securing financing or meeting specific tax reporting requirements. However, understanding when each approach works best becomes vital for effective resource and time management.

Working with BPM for your valuation needs

BPM helps you determine which fair value analysis approach works best for your real estate portfolio. Our valuation team develops customized solutions that meet your reporting needs while optimizing your time and resources.

To discuss how we can streamline your real estate valuation process and ensure ASC 820 compliance, contact us.