The sale, borrowing, purchase or even a leasing option for commercial properties is in most cases hinged on the accurate appraised value associated to the building. However, assessing these values, is usually a complex task. Whether the property is a retail-shopping center, industrial complex, an apartment-building or a business structure that is owner-occupied, the commercial appraisals happen to be more subjective in comparison to the residential reviews.
The reason for this is that the values on commercial properties are in most cases are reliant on uncontrollable elements such as less available comparable, current market prices that these spaces rent for, along with overall costs for maintenance which usually vary significantly from one industry to the next. The other element involved is associated with what buyers are prepared to pay.
With all these different variables that need to be taken into account, how does a small business-owner or investor price potential properties? Here are the common valuation methods that are commonly used to arrive at an intrinsic value.
- The Cost Approach
This is a valuation method that considers costs involved to rebuild a structure, which takes into account current costs with the associated land, the construction materials, along with any other costs involved with replacing an existing structure.
The cost approach is typically applied in the cases when an appropriate comparable is difficult to find. Examples of this is when a property features specialized or relatively unique improvements, or if an upgraded structure has added value that is substantial to the overall underlying land.
- The Income Capitalization Approach
This is a valuation method that is mainly based on the expected income the investor could derive from the property. This projected income can be in part be derived from comparing other local and similar properties, along with the expected decrease associated with maintenance costs.
For example, if a building has been purchased for $1 million, with an expected yield of 5%, which is based on market research that is local to the area. The $50,000 annual expected income may be enhanced by any tightening inefficiencies, along with other options of passing along other costs that are associated to a tenant, such as water or electric use. All of the expected income into the future will be discounted in order to reflect a present value.
- The Sales Comparison Approach
This valuation method is also called a “market approach”, that mainly relies on the most recent sales-data on comparable properties. In the way of finding buildings that have been sold recently with properties that are similar within the very same market areas, the buyer might find a market value that is fair on the property they are interested in.
An example of this, may be a 10-unit apartment building can be compared to a similar building that was sold a couple of months earlier in the same area or neighborhood. Even though this is a valuation method that is generally used for valuating residential properties, it comes with a significant drawback. Dependent on the localized and general market conditions, in most cases it is often difficult to locate recent comparisons with similar properties.
Over and above the above mentioned more commonly utilized valuation methods, there are other methods which can provide valuable insights for potential investors. Some of these include:
– Value Per Gross Rent Multiplier
The GRM (Gross Rent Multiplier) is a calculation that is used for measuring and comparing the potential value of the property in the way of using the price of a property followed by dividing this amount by its overall gross income. This is a method that is typically used for identifying properties at a low price that is relative to the potential income that is market-based.
– Value Per Door
This method is on occasion used for valuing apartment buildings. This a valuation method which divides the worth of the building by the unit numbers. For example, a building that features 20 apartments that has been prices at $4 million, would then have a value of $200,000 “per door”, regardless of the size of each unit.
Important Benefits Of Valuing Commercial Property
Any person who has sold or bought properties, will know that valuations are prerequisites in order to complete the transaction. It is important to consider having the valuation done when a property was first tenanted followed by comparing the valuation conducted as the lease expires, may present important information for deciding on damages that were suffered with the associated parties.
Here are a few important benefits of obtaining commercial valuations on a property regularly.
– Obtaining Finance
When the business owner’s property portfolio is in need of additional funding from a bank, to either raise the capital for a deposit, or to buy a new property, development or maintenance, the loan will in most cases be secured using an asset that is registered in either the business owner’s business or personal name.
The bank will appoint a professional valuator in order to confirm a value on the commercial properties, with costs of this valuation which will be carried by a customer that seeks this type of funding from a bank. Many clients are known for not finding out about growth that has occurred on the value of their commercial property.
As the property value grows, the risks for the banks will decrease, which means clients can renegotiate on the lending terms, as well as apply for necessary additional funding. Using a commercial property-group that is reputable for an estimate can assist greatly.
– Finding Out The Best Use Of The Property
In certain cases, determining how to use the property to its best use can garner the very best selling-price. An example of this is when a residential property could be rezoned easily for commercial activities, that could bring in sales prices that are higher, compared to marketing this property to the residential buyers.
When considering market-related rentals, that are obtainable from various commercial-asset classes, such as industrial, offices or retail, followed by assessing the asset class which is suitable for a relevant property, the owner could unlock improved rental yields.