The appraised value of a building is often crucial to the successful purchase, lease, or sale of the property. And knowing the value of the building can help you determine how to proceed in the transaction. But how will your property be valued, and what elements do those completing the appraisal take into consideration? In this latest post, we’ll explore some of the more common methods of commercial property appraisal.
Using the Cost Approach
One of the more common models of valuing a property is using the cost approach. The cost approach takes into consideration the total cost to rebuild the existing structure from scratch while considering land costs and construction materials. This approach is often used by lenders and appraisers when unique changes have been made to the building, making any comparison to other properties in the area unworkable.
The Sales Comparison Approach
The sales comparison approach, which is also known as the market approach, involves comparing the property to existing, similarly sized properties in the area that have recently been sold. This allows you to then reach a fair market value for your property. Taking this type of approach can be difficult in the commercial marketplace, however, as there are very rarely two similarly sized properties of the same age and build quality within a specific region.
Value Per Gross Rent Multiplier
Used primarily to identify properties that are undervalued, the value per gross rent multiplier involves dividing the price of the property by its gross income and then reviewing potential additions that can increase value.
The Income Capitalization Approach
This commercial property valuation process is unique to the residential property valuation process in that it takes into consideration the potential value derived from the building. In this approach, the person conducting the appraisal will take into consideration the expected income the owner of the property will receive over a certain period of time. The rents of similar properties in the area and maintenance costs paid by local commercial property owners are typical factors involved in this process.
What You Should Know About Appraisal
Now that you know more about the various methods of appraising commercial property, you should also take into consideration these elements of the process.
Appraisal is Not an Exact Science
Appraisal work combines subjective considerations and mathematic calculations, and each appraiser can come to a different conclusion.
The Value is in the Eye of the Beholder
If the commercial building owner does not want to sell, then the appraised value is irrelevant. Review all the elements involved in the deal before coming to your decision.
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Zack North is the Director of Marketing for Commercial Direct. As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.