The value of commercial real estate depends on a variety of factors, ranging from its size and condition to local traffic patterns and the revenue history of the property. To balance these elements and determine the worth of a building, real estate appraisals employ a variety of methods, each of which focuses on a different aspect of the investment. Understanding how appraisers reach their conclusions will help you get an accurate valuation before putting an office building on the market or investing in a retail location.
3 Commercial Real Estate Appraisal Techniques
1. The Cost Approach
The cost approach simply assumes that the value of the property is equal to the cost of purchasing land and building an equivalent structure, without factoring in future revenues and liabilities. In some areas, the value of the land may be more important than the cost of the structure being appraised.
2. The Sales Comparison Approach
Instead of focusing on land value and construction costs, the sales comparison approach bases an appraisal on the current market price of similar properties. To calculate the value, real estate appraisers will examine records of recent sales of similar buildings in the same market. Because real estate prices can fluctuate dramatically, the results of a sales comparison appraisal can be highly variable.
3. The Income Capitalization Approach
Real estate investors often rely on the income capitalization approach, with factors in the long-term earning potential and the property’s current market value. Income capitalization real estate appraisals are calculated by dividing the property’s net income by its current price, based on comparable sales in the area. The resulting percentage can help determine whether a certain property will provide an acceptable return on the investment in the long term.
Whether you’re listing a commercial building for sale or looking for an investment opportunity, Galvin Realty Group, Inc. have the expertise you need and real estate appraisals you can trust. Their team of experts has been serving property owners and investors throughout New York’s Monroe County since 1987, offering comprehensive services informed by an in-depth understanding of the local market. To discuss your project and schedule an appointment, call (585) 546-1290.