The appraisal of a property is one of the most pivotal components when it comes to commercial real estate. All parties involved in the overall transaction will come together to figure out what this estimation may be. How, therefore, can this be done accurately? Several techniques to determine a property or land’s value can be employed.
Professional appraisers in real estate will use one of these approaches to evaluate a property. Each technique has their own advantages, but also come with their own drawbacks as well. Oftentimes, several methods can be combined to produce a better estimation.
Commercial appraisal is an essential process of any real estate transaction, because all parties involved will want to get their fair share. A buyer, for example, will want the property in question to have a good market value. Likewise, a seller will employ valuation techniques to get the best possible return. When it comes to lenders, they will only act when the property is sufficiently deemed as valuable. It may take time to agree upon a set value, but it ends up being invaluable when things eventually move along.
Here are six of the most common commercial real estate valuation methods:
Method #1: Cost Approach
The cost approach is a very popular commercial real estate valuation method. Generally speaking, appraisers will estimate a value of the property based on what is assumed to construct the property itself. While this can be an excellent starting point, there are other circumstances to consider.
For starters, the general location of a property is not taken into consideration when using the cost method. The geography of a specific property can have a fluctuating market value, which can make or break a desirable value. When professional appraisers require a generalized lead, this is their best bet.
Method #2: Income Capitalization
Most commercial real estate valuation methods often hinge on the transaction-based nature of the real estate process. When it comes to this specific method, the main goal is to find a value that is based on projected income. Investors, for example, will utilize this method to anticipate how much income one property can make versus another.
Overall, the true value of a property in question may come from all future financial benefits. This can be relatively challenging to evaluate, given the difficulty of anticipating what the future may hold. However, if the property is to be used for making money, it is the most effective technique to implement.
Method #3: Sales Comparison
This approach is one of the best commercial real estate valuation methods to use. In essence, this method refers to recently sold properties that will be used for comparison’s sake. A property in question, placed in a specific market, will be compared to its nearby counterparts. Then, advantages and depreciating values are used to take the evaluation further.
If there are strong sales reports in the area, then a sales comparison method can be much more effective. This is why appraisers working in real estate favour this technique, as market trends can be favourably used. However, if the market is weak, an accurate value may be more difficult to ascertain.
Method #4: Value Per Door
Single-unit structures of any kind are not the only properties in which valuation methods can be implemented. Professional appraisers will also implement specific techniques to determine an apartment’s true value as well. In this light, the value per door valuation approach will be applied.
The entire building’s worth is brought into question, based on the number of available units. The size of these units are not typically considered when using this method. Appraisers will then use a specific formula based on this premise. In this light, commercial apartments are given their own special treatment!
Method #5: Gross Rent Multiplier
Similar in vein to the income capitalization approach, this method uses a property’s potential value as a start. Then, the price of the structure is divided by its total gross income. This can be helpful, when trying to determine properties with a low price.
Method #6: Rentable Square Footage
By combining a property’s usable square footage, with common tenant benefits, a new valuation method arises. These benefits can include amenities such as elevators and stairwells, all of which are taken into consideration. The cost per rentable square footage approach is useful when trying to evaluate a building’s actual value.
The entire commercial real estate process can be extremely meticulous. This sentiment is especially true when trying to determine a property’s true value in a given market. That is why one or several techniques must be used in conjunction with one another. Once an accurate evaluation is determined, all parties are that much closer to walking away happy!