The type of commercial appraisal method used to evaluate your property depends on the circumstances, location, and earning potential.
Whether you are looking to buy or sell a piece of commercial property, you will need to have a commercial property appraisal done at some point before closing. In today’s market, lenders typically require an appraisal prior to signing off on a mortgage or other real estate loan. Lenders want assurances that the value of the property they are financing at least meets the terms of the loan. Understanding the three most common commercial appraisal methods will allow you to take a more active role in the process.
- The Income Capitalization Approach
- The Sales Comparison/Market Approach
- The Cost Approach
With this commercial appraisal method, the appraiser researches capitalization rates for nearby and similar commercial properties. From there, the idea is that those capitalization rates can be used to convert the anticipated benefits into a measurement of property value.
There are two ways this valuation can be done: 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, or anticipated change in the value of the investment. Another way is through the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.
This is generally a reliable approach, especially in situations where the commercial property itself is located nearby other similar properties, or in a similar market setting.
Another potential method a commercial property appraiser may use when determining the value of your property is that of the Sales Comparison/Market Approach. This method is the most widely utilized in commercial real estate and is known for its accuracy and reliability. It involves analyzing commercial properties that have recently sold and their respective sale prices. This figure is used as a base value for the property in question.
From there, appraisers may increase or decrease the estimated value based on potential advantages or deficiencies. For example, a property with more square footage than its comparison property may earn an increased appraisal value, whereas a property with structural issues may be determined at a lower value.
This approach is not as common and is typically utilized in the analysis of newer properties or proposed construction, as well as special purpose structures. The Cost Approach is extremely reliable in a situation where the presence of total accrued depreciation is minimized.
The Cost Approach begins 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. The difficulty with using this approach is that it requires a lot of knowledge of the materials and their respective values. It also makes the assumption that the property value has not materially increased or decreased over time, but has remained nearly the same since it was built — which is pretty rare in a commercial property. If you are looking to buy or sell a commercial property, you should contact a commercial property appraiser to ensure you are getting an equitable valuation.
If you would like to learn more about commerical property appraisal methods, contact Ferstl Valuation Services at 501.313.0641 to schedule a free consultation. We have over 48 years of experience in Arkansas, and we are the largest full-service appraisal firm in the state.