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Appraisal is precisely determining the value of a commercial real estate property is crucial for various reasons. Buyers, sellers, lenders, and tax authorities require an accurate understanding of the property’s worth to set appropriate prices, assess risks, and determine taxes. Opting for a commercial property appraisal is the widely accepted method within the industry to establish the value of commercial real estate properties.
What Is A Commercial Property Appraisal in the US in 2024?
A commercial property appraisal’s job is to figure out the real value of an investment property. This usually includes properties that generate income, but it could also be vacant land that’s kept for investment purposes.
The appraisal is like a neutral opinion on the property’s value, and it’s done by a qualified third-party appraiser.
Types of Commercial Property Appraisals
Commercial property appraisals cover a wide range of places like apartment buildings, offices, factories, shops, malls, institutional properties, undeveloped land, and more. Basically, if it’s an investment property and not for personal use, a commercial appraisal can help determine its value.
Since investment properties are usually held for their income or appreciation potential, many commercial building appraisals mainly look at the expected earnings or returns. There are also some other methods used, but the most common types of commercial building appraisals include:
This way of figuring out a property’s value looks at how much it would cost to rebuild the property from scratch. It considers things like the land, materials, and labor, and there’s a standard formula for it. Here’s the formula:
Property Value = cost of land + cost of building new – accumulated depreciation.
But, just so you know, this method isn’t used all that much. It’s not the best fit for older properties because they’ve depreciated over time, and building costs have probably gone up since they were first built. However, it might make more sense for newer properties, where building costs haven’t changed a lot.
This method looks at a property’s value based on how much money it can make and its costs. It gives a lot of importance to factors like net operating income (NOI) and capitalization rate, and there’s a simple formula: Property Value = NOI / cap rate.
It’s actually one of the most popular and reliable ways to figure out the value of a commercial property. As long as the cap rate used is right (and that needs accurate comparisons), the valuation should be pretty accurate too.
This method is also known as the sales comparison approach. It figures out a property’s value by looking at the sales prices of similar properties and considering overall market conditions.
People use this a lot for houses and such, but not as much for commercial buildings. It’s because finding similar comparisons for investment properties isn’t always easy.
Gross Rent Multiplier Approach
This method figures out a property’s value by looking at the rents of similar properties. It’s kind of like the market approach, but instead of sales prices, it uses the total rents earned. The gross rents and valuations of these comparable properties help set a ratio for valuing a property based on its rents.
However, people don’t use this method as much, and it’s for the same reason the market approach isn’t super popular – finding accurate comparisons can be a bit tricky.
Value Per Door Approach
This method figures out a property’s value by looking at the number of units it has and the expected value of each unit.
It’s usually used for places like apartment buildings or similar setups where most units are alike, making it easier to estimate their values.
Value Per Rentable Square Foot Approach
This method determines a property’s value by looking at the rentable square footage and the expected value for each square foot. It doesn’t consider space that can’t be rented because it doesn’t bring in any income. This approach is handy for various properties, not just multifamily ones, as it focuses on the consistent square footage, even if the rented spaces are different.
Why does Commercial Real Estate need an Appraisal? Why it’s important ?
Commercial real estate appraisals are helpful because they provide independent evaluations by qualified experts. This makes them reliable and impartial. Appraisals use various methods to fairly determine a property’s value.
Different parties may order an appraisal for their specific reasons. These stakeholders could include:
- Lenders when underwriting a property’s primary or secondary financing
- Sellers when pricing a property’s listing, considering offers, and countering offers
- Buyers when placing offers and considering counter-offers
- Owners/Investors when considering purchase, sale or renovation
- Owners and lessees when negotiating lease rates
- Governments when seizing property via eminent domain
- Governments when conducting tax assessments
- Owners when appealing tax assessments
- Insurance companies when assessing damage and claims amount
What 6 Factors Do Appraisers Look For In A Property
The factors that commercial property appraisers look at when valuing properties depend on the valuation method. Some factors that appraisers might look at include the following:
- Property location and local commercial real estate market
- Property building costs (including labor and materials), and age
- Property square footage, and number of units
- Revenue per square foot, per unit, and in total
- Net operating income
- Comparable properties’ values, revenues and cap rates
5 Tips How to Boost the Value of Your Commercial Property
When the value of commercial properties in your area goes up, it generally boosts the value of your own property too. So, it’s crucial to think about the current and future local conditions when first investing in a property.
After acquiring a property, investors can enhance its value through one or more of the following:
- Attracting new tenants that pay higher rents
- Increasing rents when renewing leases with current tenants
- Renovating current spaces, systems and/or features
- Adding more space and/or features
- Reducing operating expenses (so net operating income increases)
How Much Does A Commercial Property Appraisal Can Cost You ? Is This Worthy ?
The cost of a commercial property appraisal can vary because appraisals come in different levels of complexity.
Factors like the method used, available data (such as comparable property prices), the uniqueness of the property, its overall value, and other considerations can make the cost go up or down. Typically, you can anticipate spending thousands of dollars for a commercial building appraisal. More intricate ones might even go beyond $10,000.
Let’s Compare Commercial Vs. Residential Appraising
- Both aim to objectively, fairly, and accurately assess the value of a property.
- Both must be performed by a qualified appraiser, with licensing required in some states.
- Both serve similar purposes, including pricing, underwriting, taxing, and more.
- Commercial appraisals are often more intricate, requiring more time and a higher cost.
- Comparisons (comps) are not as commonly used in commercial appraisals but are standard in residential ones.
- Commercial appraisals often consider income factors like rents and net operating income.
- There are various types of commercial appraisals, while residential ones typically use the market approach.
- Reports for commercial appraisals are generally longer in comparison.