Commercial real estate is a competitive sector. Anyone interested in investing in a commercial property should know how much it is worth before making a decision, as losing a lot of money can be easy if you have no idea what you’re doing.
Appraising a commercial property is complex and time-consuming. Even if you think you might be able to get an idea of the value of a property on your own, you should rely on an appraisal provided to you by a professional to make an informed decision.
When you use a commercial appraisal service, start by letting them know why you want this appraisal, and what your final goals are. If the appraiser requests any document or any piece of information from you, don’t withold anything from them.
When you collaborate with your appraiser from the start, you help them save some valuable time. You also ensure they will be able to quickly provide you with an accurate appraisal. But how can you figure out how much a commercial property is worth before purchasing or selling it? The easiest way to do this is to contact a professional appraiser to obtain an appraisal.
If you would like to find out what an appraiser is doing, learn more about how to appraise a commercial property:
1. The appraiser should start by inspecting the commercial property
In order to appraise a commercial property, the appraiser should start by inspecting the commercial property first. Appraisals of commercial properties are more subjective that appraisals of residential properties. In both cases, the appraiser will have to inspect the property to be appraised. But inspecting a commercial property is generally not going to take as long as inspecting a residential one.
The reason for this is quite simple. The overall value of a commercial building is based not so much on the building itself, but mostly on the rental rates associated with it, put in comparison with the expenses that will need to be paid out.
Appraisers therefore need to investigate different aspects of a commercial property before they can have a clear idea of its fair market value.
2. Three different approaches can be used to appraise a commercial property
Apart from inspecting a commercial property with a meticulous attention to detail, an appraiser will be making some research about the neighbourhood and its zoning status. They will also use three different approaches to appraise the property, and the results of these three appraisal methods will be combined to determine its market value.
However, depending on the type of a property and on the real estate market it is located in, an appraiser might insist on one method more than on the others to calcutate the value of a commercial building.
Let’s learn more about these three approaches: the income method, the comparison method, and the cost method.
3. The income method is perfect for appartment complexes and shopping malls
If the commercial property to be appraised is an appartment complex or a shopping mall, the appraiser will rely a lot on the income method to determine its value.
These types of commercial properties can generate a steady stream of revenue, as long as they attract and retain tenants. A shopping mall that has a lot of vacant retail spaces, for example, will not generate as much income as one where all the stores are attracting many shoppers.
To determine the income generated by a property, and to figure out whether it’s a reliable source of income or not, appraisers will look at different factors.
For other types of commercial properties, such as retail stores, restaurants, and industrial warehouses, for example, the income method might not be as important as for shopping malls.
4. The comparison method involves researching the values of similar properties
Appraisers also use the comparison method, which involves researching the sales prices of commercial properties that are similar to the one to be appraised.
Even if these sales prices are public record, it can be time-consuming for an appraiser to acquire the necessary documents and to compare them.
Appraisers can also do some research on commercial real estate websites and try to find the sales prices of different properties in online listings. However, they are more likely to find the asking prices of buildings that are currently for sale, than the sales prices of the ones that have been sold recently.
The comparison method can take a lot of time, but the results should weight heavily in the final appraisal.
5. The cost method aims to decide if building a new property would be a better investment
Finally, the cost method is used to determine whether building a new property would be a better investment than purchasing a property currently for sale.
To do this, appraisers must estimate the value of commercial land, as well as the costs of erecting a new building, and compare it with the value of a property, minus the depreciation.
As you can imagine, the cost method can be extremely complicated, but it can also be extremely useful.