Three Methods of Appraising Commercial Real Estate Value

1. Three Methods of Appraising Commercial Real Estate Value Commercial real estate services cover the valuation of commercial properties of all sizes and for all purposes. Commercial properties include shopping centers, industrial sites, large apartment complexes, and office buildings.In ​commercial real estate valuation​​, the agent will submit detailed reports which have the necessary information related to the property and an accurate valuation The three principal methods for appraising property include cost, sales comparison, and income capitalization. Cost Approach The cost approach method in a commercial property appraisal considers the real value of the site and expense that would be involved in constructing a building with the same features. As this approach considers the depreciation value of the property, it is most valid when assessing relatively new structures as gauging depreciation value for older structures is difficult. The depreciated replacement cost of the improvements is added to the estimated land value for a final value estimate. To estimate the land value, comparable sites with similar utilities, zoning and use contribute to determining the site’s value. Sales Comparison/Market Approach The sales comparison approach also known as the market data or comparable sales approach is the most common of property valuation methods. It is mostly used for land and residential real estate, especially single-family homes.This method involves selecting properties with similar characteristics in the same market area that have recently sold and comparing them to the

2. property in question. In a commercial property appraisal ​​a professional appraiser will deduct value from the subject property for comparative deficiencies and increase value for advantages. Income Capitalization Approach The Income Capitalization Approach in a ​commercial property appraisal is for apartment buildings, commercial real estate, and multi family homes. It considers the return on investment and the net income of a property.This method branches out into two property valuation methods: Direct capitalization where a property’s annual gross income is estimated. The effective gross income is then assessed by considering the influence of vacancies. From there, the net operating income is calculated after subtracting expenses. The property’s value is then estimated using the property’s capitalization rate, or cap rate, and net operating income. The second method is via gross income multipliers. This method is used for real estate properties that are not initially purchased as income properties but land up being used as such. Examples include family homes. The monthly or annual gross income of the rental property is calculated. Then, the sales price of the property is divided by its rental income. This calculates the gross income multiplier, which is then used to find the property’s market value. All of these appraisal methods are very different and can be challenging to the appraiser, since market data is relied on in all three approaches.