How to value this commercial space

How to Value Commercial Real Estate

Posted by Alex Field on December 10th, 2018

Knowing how to value commercial real estate is the key differentiator between having a fruitful outcome and a loss-making deal. When acquiring, selling or investing in commercial property, knowing how much it is worth is essential. Whether you are seeking to lease a retail shopping space, invest in an industrial park or purchase an apartment,  you will automatically want to assess the value of the property to have a favorable return on investment. Commercial real estate valuation is an intricate task, and the fact that each property is affected by its unique set of elements such as prevailing market rates and maintenance cost means that there is no one-size-fits-all when it comes to evaluations. Luckily, professional appraisers have some scientific methods they use in determining the value of commercial properties as outlined below.

The Cost Approach

Commercial real estate valuation by this method is arrived at by putting together the cost of acquiring the bare land and the cost of erecting the buildings from scratch. While the cost approach may be advantageous in giving the current value of commercial property, it neither offers a comparison to similar properties nearby nor points to revenue that can accrue from the property.

Income Approach

Income capitalization approach or simply income approach is the most common way of establishing value in commercial real estate dealings. In this methodology, a property’s worth is identified by determining the potential income generated from the property and comparing it to initial costs. This approach can accommodate various unique factors and also puts into perspective the dealings of similar properties. However, it might overstate the expected income in case of costly repairs and collection losses in the future.

Market Approach

Market approach or sales comparison approach to commercial real estate valuation is a comparison of the sale activity of comparable properties. Many investors seek to find how much have equivalent units fetched in terms of rental income or sale proceeds over a specific time frame to attach price value to their properties. It is worth noting that the market approach is to some extent generic and not quite reliable in its entirety since no two properties are the same. Nevertheless, the sales comparison approach offers a reasonable estimation for real estate.

Why you Must Shun Online Estimates

Property estimates in websites like Zillow, Trulia, and Realtor, are hugely overpriced. Such properties usually stay unsold for long durations and end up fetching far less than if the value was initially set more precisely. Indeed, these sites give conflicting prices for the same property, which is a pointer to their inaccuracy. Undeniably, online estimates have improved over time, but they still do not come close to professional appraisers or real estate agents when it comes to accuracy.

The need to use only a certified professional appraiser when making commercial real estate valuation cannot be overemphasized. Getting your valuation from a professional eliminates the risk of deceitful estimations and is arguably the only way to avert an extensive real estate crisis like the one experienced in 2007. If you are considering putting your money into real estate or selling your property, the first step should be getting a trustworthy agent or a professional appraiser. This will save you not only money and time but also the heartache of slowly and emotionally realizing that the value of your venture is wrong.