Commercial Real Estate Appraisal Methods by Christopher Sanz, JD, LLM
Posted on May 05, 2021
There are three appraisal methods commonly used to determine the market value of a commercial property involved in a sale or acquisition. While each approach relies on different data and facts, the final valuation may employ a combination of all four appraisal methods.
- Income Capitalization (Cap) Rates are used to calculate the annual rate of return a commercial property can generate for its owner(s) by dividing net operating income (NOI) by the purchase price. It gives investors an idea of the income or cash flow they can expect to receive from a property, based on gross income, less operating expenses and in consideration of other factors, such as a property’s locations, vacancies and lease terms.
- Sales Comparisons (Comps) estimate a property’s market value based on recent sales of similar properties by location, size, use, features and physical characteristics. Using this method of appraisal involves adjustments in price per square foot or a percentage of overall value based on similarities and differences between the subject property and the comparable properties.
- The Cost Approach to commercial real estate appraisals compares the cost of buying an existing structure versus the amount an investor would need to spend to rebuild and re-tenant a similar property on a similar plot of land at current market rates. It helps investors determine whether a property for sale is overvalued based on a comparison of the asking price to the costs required to reconstruct it from scratch.
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