There are many ways to appraise a commercial real estate property. Some are more common and most realtors or property owners will use them; others aren’t as common and only a select few will use them. It all depends on the end goal of why you are appraising a property. Are you looking to buy the property? Are you looking to sell the property? Or are you trying to figure out how much you should charge for rent? These all factor into which method is best for you to use for the appraisal process.
Before you begin the appraisal process it is important to determine a property’s value. The value of a property should not be confused with the price or cost of the property. There are some factors that weigh into what a property is valued at.
The main factors that weigh into what a property is valued at are: demand, utility, scarcity, and transferability. Value is contingent on how many people want to buy the property, if the future owner is going to be satisfied with the property, are there a limited amount of properties in the area, and how easily the ownership rights can be transferred between owners.
Understanding the market value helps appraisers come to a conclusion on what their opinion or estimate of the property’s value will be. The two best and most common ways to appraise a property are the sales comparison/market approach and the income approach.
This approach is focused around comparing local properties to one another to see what they have in common. Seeing what they have in common can help appraisers come to an agreement of the value of the property’s features. This means that they will look at features like, how many cars can fit in the property’s garage, if they have a fireplace or not, and so forth.
This method will also take a look at the market and determine how similar properties in the area are being appraised. The appraisers will take these values into consideration when they are appraising the property in question.
As the title of this approach might suggest, income is the main factor that is weighed in appraising a property using this method. Generally, the investor or appraiser will look at how much income is generated from the property and analyze that number against the current market conditions.
The amount of income that is generated is broken down into what is called the direct capitalization approach. This approach will estimate the gross income that is generated and then deduct all of the expenses and potential losses that the property may have. This will help determine whether or not the investor will be able to turn a profit if they did decide to purchase the property and give its true value.
Appraising a commercial property is done in a number of different ways. Outlined here are two of the most common ways investors will appraise properties; using resources on the Internet can help you determine which method is best for you.
