This is partly due to the fact that there are three different methods that appraisers use to value a commercial property.
To ensure you invest wisely when buying business real estate, it’s important that you seek the right kind of appraisal depending on the individual property, what you intend to do with it, and your ultimate investment goals.
1. Sales Comparison Method
The sales comparison method of appraising properties when buying commercial real estate is the most common approach used to value existing properties that are not new construction.
It involves comparing commercial real estate to others like it in the same market, including those for sale or that have recently sold.
The sales comparison appraisal method takes fluctuating market prices, improvements, land value, square footage, condition, and many other physical features into consideration to derive a value comparable to what can be found with other similar properties.
2. Cost Method
Used mainly for valuing new construction, the cost method of appraisal is done by considering the actual cost incurred to construct the building.
Essentially, the cost approach provides those buying business real estate a value according to what it would cost to build the same building over again from the ground up using available materials, minus any depreciation.
It requires a thorough knowledge of the construction type, materials used, land costs, and more, all of which are then compared with other similar commercial real estate in the area.
The biggest pitfall when using this approach is that it can be hard to assess a value when there are no similar new properties within the same real estate market as a comparison.
3. Income Capitalization Method
The last method of appraisal to consider when buying commercial real estate is the income capitalization approach which gauges value based primarily on property income and the things that can affect income.
This method assigns a value by dividing the net operating income or NOI generated by the property, by the capitalization rate in the current market.
Accurate analysis using this method also takes other things into account like recent selling prices of other similar properties, building condition and need for improvement, occupancy rates, and other factors that can affect income-producing ability.
The income capitalization approach to valuing property when buying business real estate can also help you estimate profit levels to determine whether it is actually a good investment.
A Summary of Commercial Real Estate Appraisals
While all three commercial real estate appraisal methods do rely on comparison with other similar properties to some degree, each is mainly done with a different focus.
Depending on your intent when buying business real estate, the value of a property may differ.
Based on this reasoning, it’s important to work with skilled appraisers who understand your investment goals when buying commercial real estate so they can do the appraisal using the right method!