How Commercial Real Estate Is Valued?

Untitled6-183x300The appraisal and valuation of a commercial real estate property is far more complex and differs vastly from a residential valuation. Many experts say that carrying out a valuation on a commercial property is not just highly subjective in nature, but can also prove to be an immensely difficult learning experience for the owner. Here are the often used methods of commercial real estate valuation.

Market approach

Also known as the sales comparison method, it is the most often used mode of commercial real estate valuation and bears semblance to residential property valuation. When an owner is in need of financing, he will usually approach a professional to appraise the property at hand and other similar properties in the area to conduct a thorough comparative analysis. Once data from the structures are compiled, the professional will typically value the property by adding value when advantages are found and deduct value for shortcomings. Once comparisons on all key aspects are completed, a value is derived.

Income capitalization

Like the market approach, the income capitalization method too seeks to determine a commercial property’s value through comparison. Except that in this method, a comparative analysis of income is considered. Investors and professional valuators arrive at a value after comparing a particular property’s income through a period of time with those of other properties in the area. The income earned is divided through the capitalization rate and a value is arrived upon.

Cost approach

This is not a commonly used method in the market. The cost approach method values a property on the basis of the construction cost. In short, the method assumes that the investment that was needed to build the property or even replace the property at a given point of time is the value of the property. This valuation method demands a thorough understanding of construction materials and costs.

As a commercial real estate owner or investor, it is important to properly understand the valuation method you are choosing to truly determine the value of the property you have at hand.