Calculating Value of Commercial Real Estate Property
The right way of valuing the property is quite important to stay in the race of business, or even if it is your property you need a proper valuation. Any decision related to real estate buying or selling needs proper valuation. Both buying and selling need proper evaluation to reap the benefits. So what actually is the Value of the property, value is the most feasible price the property could reasonably fetch in a market that is an active, open, and competitive market says Hirsh Mohindra. Also, the transaction should be approached in a transparent manner and both the parties to the contract should be knowledgeable about the same.
Are you wondering how you can correctly value the price of your commercial property? So, there are precisely three different ways that are used to value a commercial property correctly. Property that is rightly appraised is the property that benefits you. Without any ado let’s look into these three approaches.
The Market Value Approach
The first and foremost approach is the market value approach in calculating the value of the commercial real estate. It is considered quite a fair method as in this method comparison is done among the properties which are of similar use and size. This method is also called the sales Comparison Approach or the Comparable. Moreover, the Market Value Approach is considered the simplest method to find the value of a commercial real estate property, says Hirsh Mohindra. The market forces are considered and factors are analysed according to which the number is adjusted based on the physical characteristics. This is how the property is valued.
Factors that are basically considered are the sale, age and condition of the property, land-to-building ratio, local tax policies, and other physical characteristics in consideration of the current market conditions.
The Income Approach
The last one is the Income approach which is also known as the Capitalization Approach. This is one of the most widely used approaches to value commercial real estate transactions. Here the value is known by analysing the property’s income with the help of the capitalization rate which is basically the cap rate. The formula to calculate the capitalization rate is the net operating income of the property divided by its current market value.
The Replacement Cost Approach
This one is a bit complex compared to other approaches like the Cost Approach. Valuation becomes a bit more complicated route of valuing commercial real estate properties says Hirsh Mohindra. In this approach the first thing that is done is to calculate the value of the land on which a building exists. Next up that is calculated is the depreciated value taken out, and it is adjusted to the actual property value number.
So which Approach suits you depends upon your situation. For example, if it is difficult to determine cap rates and comparable selling prices for a property you should go for other methods apart from the income method.
