3 Key Commercial Real Estate Appraisals Approaches Used When Valuing Property
Appraisals are done for many reasons. The most common is to find out the market worth of a property when it's sold, mortgaged, or used as collateral on loans. They can also have major implications for tax and insurance rates. This article highlights three commercial real estate appraisal approaches used to assess the property.
Cost
This method involves determining the replacement property's worth by considering what it would take to reproduce or replace it. This depends on factors like size, location, and condition. Consideration is given to whether you are replacing it with new construction or rehabilitating an existing building. It helps establish market value.
One common method of this approach that appraisers use is the square foot method. It involves comparison with other properties in your area and can be more useful when valuing land. Valuers can also use it to value an existing building, provided that there have been no significant changes or upgrades since it was constructed.
The other technique is the reproduction cost method. It's used when there are no other properties to compare in the area or when appraisers can't determine land value. For instance, it can be used to value a single-family home that's far from other homes and isn't likely to be redeveloped.
Sales Comparison
This approach aims at identifying similar properties that have been sold in an area over time and use their price per square foot for an appraisal estimate. In this technique, valuers look at types of business property such as office buildings or shopping centers and specific property features like parking spaces, tenant finishes, and equipment.
The sales comparison approach requires a good understanding of the market area. That's why it's done by appraisers who know the local economic conditions that affect business real estate values. It also requires access to sales data. Appraisers can compare their estimate with the actual value of a property by looking at assessed values or sale prices. You can use appraisals from this approach to apply for a business loan.
Income
This is a popular method to estimate value. It involves assessing an expected future stream of net income and capitalizing that into a single measure of value, usually referred to as net present value (NPV). This approach is ideal for properties that produce income like office buildings, shopping centers, and apartment buildings. It looks at the future income that a property will earn over its remaining life or anticipated holding period.
A commercial appraisal can be an essential tool in any real estate transaction. They'll give you the information you need to make sound business decisions. If you need help with commercial real estate appraisals, contact a commercial appraiser.
