How to Fully Understand the Value of Commercial Properties: A Full Guide
There are possibly two reasons why you are currently reading this article. The first one is because you simply want to learn more about this topic (you may never know when you’ll need it) and the second one, is because you are planning on purchasing a commercial property.
Why is it so essential to know about the property value? This type of information is necessary for the right transaction, and, concurrently, to secure desirable commercial mortgage rates. Lots of people nowadays rely on it when they want to negotiate a good deal.
A surefire way to accomplish that is by knowing how to calculate it, which is going to be explained in this guide. Therefore, without further ado, let’s see everything that needs to be said about it below!
Is It Difficult To Determine The Value Of A Commercial Property?
The truth is, if you’ve never done it before, then you may find it a bit complex. Although a couple of strategies are going to be enumerated that can help you out during this process, commercial properties connoisseurs at Market Commercial would like to remind you that if you do not find any of them useful, then it means that you should put your trust in the expertise and knowledge of a seasoned real estate appraisal company. Why is that?
Well, that’s because they are capable of offering you an honest and realistic opinion of the property you are interested in, which is crucial for a variety of different transactions, like property tax assessments, refinancing, and home sales.
Furthermore, they are able to properly determine the real value of a commercial property, which is surely a massive advantage. But the point is that a property’s value can be determined only if both the seller and buyer agree upon a particular price. This is where the expertise of a commercial property appraiser comes in, as they are trained to consider all factors such as location, condition, and potential for future growth in order to accurately assess the property’s worth. In addition to these factors, the appraiser will also take into account the ac and heating basics of the property, as these can significantly impact its overall value. By taking all of these elements into consideration, the appraiser can provide an unbiased and well-informed estimate of the property’s value, helping both parties come to a fair agreement.
As previously concluded, there are several strategies that can be used for these purposes which will be discussed today.
Let’s Start With The Cost Method
This one is also known as a replacement cost approach and it includes the current value of the land a certain building is situated on, along with the construction expenses if you decide to rebuild the property all over again.
In these instances, you need to take into consideration the building’s depreciation, necessary maintenance, the age of the structure, and potential indicators of wear and tear. This strategy can help you define the value of the brand-new property on the land that was recently sold or for properties that come with special features.
Moving On To The Cost Approach
The logic behind this one is that a potential buyer would not give more money for a specific construction than it would cost them to build a similar one from scratch. The method that is utilized to determine the value of it is: Property value = Replacement Cost – Depreciation + Land Value
The replacement cost can be determined by employing the replacement strategy which assesses the overall expense of constructing a structure with the same level of utility as the one that’s been valued.
Besides this method, you can use the reproduction method too which determines the cost of building an exact duplicate of the construction being valued employing exactly the same construction methods and materials.
Depreciation indicates the gradual decline in the value of a commercial property that was caused by physical deterioration.
The Income Approach
If you want to utilize this approach, then you first must determine the cap rate and NOI (net operating income). Then you can employ any of these two formulas to estimate the property value.
In addition, this method can also be utilized to assess the potential return on investment (ROI) of a specific property by making a comparison between a purchase price and NOI. The return on investment can be determined either by multiplying NOI by an ROI or by dividing NOI by the purchase price.
Sales Comparison Approach
This approach is known as the market value approach as well and it depends on transaction information from the commercial properties that were recently sold. Furthermore, the current sales data would then refer to the ballpark figure for the commercial property’s value as long as things like age, size, location, condition, and neighborhood demographics of both structures are similar.
If by any chance, there are some major differences when it comes to this, then you need to take them into consideration too.
As stated in the beginning, there are a couple of methods that you can utilize for these purposes, hence it’s of huge importance to go through all of them to see which one suits you the most.
