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The old saying goes that an item’s value is determined by the price at which it is sold. This is also mainly true in the realm of commercial real estate investment. Value is determined by the highest price an interested buyer will pay for a property. Value, in other words, is not completely relative. Although there is no single, universally accepted method for estimating a property’s worth, several industry standards have emerged. When negotiating a price, the buyer and seller might use these calculations’ information as a benchmark.
Methods of valuation are defined here. After reading this article, you will have a solid understanding of the factors determining the value of the commercial real estate and the methods utilized.
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Ways to calculate the commercial property value
Comparable Valuation
The most popular method for valuing commercial assets is based on recent comparable sales transactions. Valuation is based on the average price per square foot, which is determined by looking at previous sales of similar properties in the area.
A sale to an owner-occupier who will use the space as their primary residence is recommended if the comparable valuation shows a significant increase in value.
Investment Valuation
A commercial property’s investment worth can be analyzed by considering several factors that need to be known in advance. Some examples are:
- Expenses incurred by the property.
- Rent money collected from the property.
- The average rate of return on investment for similar properties in the same market.
Don’t forget that even if the house is empty, an investment valuation can be done on it. Possible income from renting might be estimated in light of lease rates in similar locations.
Let us assume that the highest value is found in the valuation of the investment. When that happens, finding a tenant and then advertising the property to potential investors is the best course of action.
Redevelopment Valuation
Residual land value is another term for this approach to appraisal. In this procedure, a development pro forma is conducted. The proforma details the potential cost of constructing a hypothetical development on the site. The purpose of this evaluation is twofold: first, to determine whether or not the project is viable, and second, to determine the maximum amount a developer would be willing to pay for the site. When the highest value is found in a redevelopment analysis, it is advisable to let builders and developers know about the property’s potential for expansion.
To make an informed decision about selling a commercial property, it is important first to determine that value. Commercial real estate value can be determined in three main methods. Analyzing all three valuation methods together guaranteed a property was priced accurately and helped maximize the final sale price.
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Conclusions
Commercial real estate valuation is equal parts art and science. In that it calls for numerous educated guesses, one may call it an art form. It is scientific in that multiple accepted valuation approaches must be adhered to for an estimate of value to be taken seriously.
In addition to supply and demand, other factors influencing the value of commercial rental properties are:
- The property’s practicality.
- Marketability.
- The ease with which it may be transferred.
- The estimated cost of replacing it.
The cost approach, the income approach, and the sales comparison technique are the three most frequent methods used to ascertain a property’s current market value.
Although all these methods are generally acknowledged and grounded in evidence, the ultimate determinant of a property’s worth is the price at which buyers and sellers are willing to part ways. As a rule, it closely parallels the outcomes of these methods.
