The value and volume of commercial property sales has been on a steady increase. Understanding the methods of valuation that an Arkansas commercial appraiser might use will ensure that you receive a fair and accurate appraisal.
Commercial property sales have been on an upswing in 2013, which means that commercial property appraisers are staying busy. An experienced Arkansas commercial appraiser can make a sale progress much more smoothly, but property owners should try to be as educated about the process as possible. One way to do so is by learning the basics of the most popular commercial property appraisal methods. If you are preparing to sell a commercial property, take some time to understand the most common appraisal methods to ensure that your property is listed at the most effective and profitable price.
Commercial Property Prices and Sales Are on the Rise
While there is an increasing trend of commercial property prices and sales in 2013, shifts in market conditions can make appraisals all the more complex. According to Real Capital Analytics, sales of properties worth $2 million or more increased by 24 percent in the first half of 2013. Prices rose by an average of 8 percent during that period based on the RCA’s Commercial Property Price Index. Changes like these are welcome after the long real estate market crisis, but they also require even more careful analysis by Arkansas commercial appraisers.
Methods Used by Arkansas Commercial Appraisers
Understanding the types of appraisal methods that are most commonly used by Arkansas commercial appraisers will allow you to take a more active role in the process. You are well within your rights to ask the appraiser which methods he or she is going to use.
The most common commercial appraisal methods include:
- Income Capitalization – A set of procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits into property value. This conversion can be accomplished in two ways. One year’s income expectancy can be capitalized at a market-derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.3
This approach is typically used in to determine the value of properties that generate income.
- Sales Comparison – The process of deriving a value indication for the subject property by comparing similar properties that have recently sold with the property being appraised, identifying appropriate units of comparison, and making adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison.2
The Sales Comparison Approach is considered a reliable indicator when the availability of comparable sales with similar usage, age/condition, and other characteristics are readily available.
- Cost – A set of procedures through which a value indication is derived for the fee Simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive; deducting depreciation from the total cost; and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.1
The Cost Approach is typically utilized in the analysis of newer properties or proposed construction, and special purpose structures, which represents the highest and best use of the land. The Cost Approach is extremely reliable in a situation where the presence of total accrued depreciation is minimized.
Contact an Experienced Arkansas Commercial Appraisal Service
Fair, accurate appraisals are, of course, expected, but not always given. If you are in need of a commercial property appraisal for any reason, contact Ferstl Valuation Services. One of our experienced Arkansas commercial appraisers is ready to assist you. See why so many around Arkansas trust Ferstl Valuation Services for their appraisal needs, or if you’re ready, request a property appraisal now.
1 Appraisal Institute, The Dictionary of Real Estate Appraisal ©, 5th Edition, 2010, page 47
2 Appraisal Institute, The Dictionary of Real Estate Appraisal ©, 5th Edition, 2010, page 175
3 Appraisal Institute, The Dictionary of Real Estate Appraisal ©, 5th Edition, 2010, page 99