Whether you are buying or selling a commercial property it's a good idea to understand how commercial real estate is valued. This will help you in determining what selling price you wish to set your building at, or if you are buying, what prices you can expect to see for the type of property you want to buy. There are a few different approaches in valuing commercial property and here are three of them.
How Much It Costs to Run
The first approach in valuing commercial real estate is, how much does it cost to run or maintain the building as a whole. This valuation includes the cost of the land the building sits on, as well as the cost of maintenance, replacements and improvements to the building and what the land and area is zoned for. There may be some depreciation in the building as it ages and wears but this is not factored into its overall value.
There is a possibility that potential buyers will only want the land and the property may be valued solely on land value. This is done by estimating the depreciation of removing the building itself – should the buyer wish to tear it down and deducting that from the overall asking price. This also requires a knowledge of the cost of the amenities available along with their class and the type of construction.
Knowing the Market
Just like with the housing market, commercial real estate can also be valued by checking what the market is doing for that particular type of property in the general area. This is done by looking at the recent sales (not the buildings simply listed for sale). The property doesn't have to look like the other properties but they do have to be used for the same or a similar purpose. Examples of this include a warehouse or rental building.
An appraiser will compare the buildings in terms of both their similarities and their differences, as well as their location.
The third way a commercial real estate property is valued is by checking to see the income potential for the buyer, or what has already been earned within the building to determine the best price for sale. You can determine this by taking the net operating income and dividing it by the capitalization rate of the market. The potential for income the buyer will likely make if they purchase the building.
This is the most common valuation for a commercial real estate property. It helps to determine whether the purchase is reasonable for the buyer's company to ensure a profit.