What are the Different Appraising Approaches used to Calculate Commercial Real Estate Value

It is very profitable to invest in the commercial real estate but you should know the value of the property before going forward with your investments.

This will help you pay a fair price in a particular real estate market or set an appropriate sales price which will attract other real estate investors.

However, you have to ensure that the land undergoes an evaluation by a certified appraiser to rule out any cost overruns after your investment.

A certified appraiser can prevent any surprises in a real estate transaction by using-

Cost approach

Sales comparison approach

Capitalization approach

These are the primary means of evaluating the value of a commercial real estate.

Let us discuss more about it.

Cost approach

The cost approach is the best method for appraisals of new property but the appraiser must have an in-depth knowledge of both construction and material cost for making an accurate appraisal.

The cost approach determines the cost of a property by assuming that it should be priced at the same level as similar buildings.

This means that the market value should take into consideration the price of the land, the cost of construction, minus any depreciation to the structure.

However, the lack of comparable property and similar construction can make the cost approach appraisal unreliable.

Moreover, the comparison should be done with a structure having the same function, updated materials, following the latest construction methods and a more modern design.

Sales comparison approach

The sales comparison appraising method is a bit different from the cost approach. Here the comparison is done between properties sold recently in the same area.

The appraiser then compares the result to your commercial property to draw a conclusion.

Here both the recently sold properties and value of current properties for sale are taken into consideration.

However, to get the perfect results, the sales comparison should include projects with the same characteristics like the square footage.

Income capitalization approach

The income capitalization approach is one of the three appraising approaches which is applicable to the property which produces income.

In this method, the value of a property is calculated by taking the annual net operating income generated by the real estate property and dividing it by an estimated capitalization rate.

In this approach, the appraiser knows the prevailing capitalization rates in given markets for the particular type of properties.

Furthermore, the investor can get an idea about the profit he can expect from the rental property and can decide whether the property would make a good purchase or not.

Conclusion

The above discussion will help you in understanding the three appraising approaches used in calculating the value of a commercial real estate.

The basic idea about these appraisal approaches will help you with your investments in the commercial real estate in the long run.

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