The sales, purchasing, borrowing, and leasing options for any commercial property depend upon the appraised value of the building. Unfortunately, it is not simple to assess the commercial property. Whether it’s an industrial complex apartment building, an owner-occupied business structure, or a retail shopping center, commercial appraisals are easier said than done. In addition, they are pretty subjective as compared to the residential reviews.
Which Commercial Appraisal Methods is Commonly Used for Real Estate?
Commercial real estate appraisal experts say that commercial property appraisal is challenging because it is dependent on uncontrollable elements. It includes the current market price for which spaces rent fewer available comparables and overall maintenance costs depend on. All these costs vary from industry to industry. Last but not least, there is a tricky question of how much a buyer is willing to pay.
Basics about commercial real estate valuation
The commercial real estate valuation it’s pretty different. Heightened value and added intricacies make the valuation process a little complicated. Nevertheless, one can check out these methods for finding commercial real estate values.
5 Top Commercial real estate appraisal methods
1. Cost approach
The valuation method mainly includes the cost of rebuilding the structure from scratch. However, it also considers the current value of the associated land and construction material besides other expenses associated with the replacement of the existing system. In short, the method assumes that commercial property’s value is equal to the cost incurred to reconstruct it.
Furthermore, the approach also assumes that informed buyers would not spend more on a commercial property. Instead, buyers would be willing to spend on acquiring land and building the property from scratch.
The cost approach is mainly applied when appropriate parables are challenging to locate. It means when the property contains relatively unique or specialized improvements or even the latest structures that add considerable value to the existing structure.
2. Sales comparison approach
The sales comparison method is also known as the market approach. This method depends on the recent sales data for comparable properties. Experts offering commercial appraisal services say that for the market approach, they consider recently sold buildings with similar properties from the same market area. When this method is used, a buyer hopes for a specific fair market value for the property.
At times to find a comp, the appraiser needs to have a look outside the market area, which wouldn’t make for a reliable comparison. Demographics, access to infrastructure and the leasing trends might look very different outside the market area. These elements can have a significant impact on the property value.
3. Income capitalization approach
This valuation method depends on the amount of income the investor can expect to derive from a specific property. The projected income must be derived in part from a comparison of other properties and the anticipated decrease in the maintenance expenses. This approach is commonly used when it comes to valuing a commercial real estate asset. You must first understand some commercial estate concepts to calculate the value using the income approach. Consider net operating income and capitalization rate. The net operating income is generated using the net income but before capital expenditures, taxes, and debt.
4. Value for gross rent multiplier
The gross rent multiplier valuation method measures and compares the potential value of a property. It considers the price of the property and divides it by the gross income. The formula is generally used to identify properties with a low cost relative to the market-based income.
If you are looking for a simpler approach to valuing commercial real estate, then this one’s for you. It takes the price of the property and divides it by the gross income to the estimated potential valuation.
5. Value for door
The commercial real estate valuation method is used for apartment buildings instead of single-unit structures. Under this method, experts determine the entire building’s worth based on the number of units.
Experts practicing AACI appraisal near me suggest different ways to value commercial properties. The appraiser generally uses more than one approach and then takes an average of the approaches to determine the property’s value.