3 Valuation Methods for Commercial Property Appraisals

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commercial appraisals

One can call real estate appraisal a science and an art. Property appraisal can be used by anyone including investors, agents, owners, or brokers to know the real Market value of that property. It has to be done very accurately so that the user of that information can make the right plan. Market value is the selling price of the property according to the market. The market can go up and down at different times due to the demand and supply balance.

Looking at commercial property and knowing its value can be complicated at times. This is why we need professionals to Implement different types of commercial appraisals. Anyone types a suit based on the type of property, location, professional qualification of the appraiser, etc. 

Basic terms to keep in mind

Market value and value of a property or two different things. First, you should know the difference between different terms, and then you should get into property appraisal. Market value is the selling price of the property based on the appraisal in a particular period. On the other hand, value is the worth of the property that the owner takes advantage of in a given period of time. 

The cost of the property might not determine the value. These are the basic terms that every professional knows And you as a property owner should also be aware of it. 

Types of property appraisals

Here we will look at the three valuation methods. Are commonly used by commercial and residential property appraisers

  • Sales comparison method

As the name suggests, this valuation method includes different properties to compare. This is best for only stable markets which have enough sales data in the recent past to allow the appraiser to do accurate comparisons. This method Is appropriate for retail property, corporate buildings, and warehouses.

It reviews the last few transactions made in the market in a similar location. It considers factors like current market conditions, size, amenities, location, etc. This appraisal method might not work for unstable markets. For example, during a pandemic, the real estate market might fluctuate a lot and comparisons are difficult to make. 

  • Income capitalization method

This method is typically used by new owners of the property. The income capitalization method focuses on the amount of income that a piece of property might generate in the future for the new owner. This method is appropriate for corporate buildings, multi-family housing, and retail properties.

This method works best for investors who look for the expected rate of return and compare it with the cost that they will have to bear while buying the property.

  1. One method is direct capitalization to determine the projected value of a commercial property. The appraiser anticipates the potential annual gross income considering the expenses and losses. For the investor, the net operating income is very important.
  2. The next method is the gross income multiplier in which The appraiser divides the selling price with rental income. The investor can determine the expected income out of the property.

 

  • Cost method

The last method is the cost method which is useful for schools, government buildings, etc. The cost method estimates the cost of replacing the property completely. It also considers depreciation that includes functionally obsolete systems, outdated features, and designs, structural issues or an undesirable location.

With these three methods, most property appraisers do their tasks more accurately.