Four (4) Ways to Value Your Commercial Property for Sale
So, let’s say you have a commercial property and you want to put it up for sale. The problem is however that you’re not exactly sure the best process of determining the value of commercial real estate (CRE) properties. Given the fact that most CRE projects are larger deals, much thought should be given so that responsible decisions can be made. We suggest beginning with the first, most basic, yet significantly important action: valuing your commercial property for sale. The fact of the matter is that valuation for commercial real estate is fairly different from the valuation of residential properties. There are added intricacies and heightened value which makes the process of valuation rather complicated.
There is certainly a right way to value your commercial property if you are planning to list it to get the best deal possible. The goal is to find the approach that becomes the most advantageous for you. Therefore, becoming acquainted with the different approaches of valuing commercial properties is a "must" and reading this article should give you an edge over these matters.
Knowing your choices
Below, you will find some of the popular approaches used in valuing CRE properties. Identify which ones will be the most suitable to use in valuing your commercial property for sale.
The Sales Comparison Approach
This is also referred to as the "market approach" – for the rather obvious reason that this method involves looking into what is called the comps or recent sales data. Sales comparison is the most essential data used in this kind of approach; however, it is not often as easy to find. As this approach is more commonly used in the valuation of residential properties and when it comes to commercial real estate valuation, one might need to look outside of the market area for like-kind comparables, demographics, access to infrastructures, leasing trends, and all other relevant information to make a more reliable comparison. The good news is there are many property intelligence or artificial intelligence-powered data platforms that are specifically intended for use in the commercial real estate industry. Appraisers or investors, such as yourself could easily and quickly have access to opportunities in any market and be able to uncover strategic insights which could ultimately result in valuing your commercial property effectively.
The Cost Approach
Since some assume that informed buyers are less likely to spend more on commercial properties than they could on acquiring land and consequently building the same property from scratch—or what is referred to as "costs to build new", the Cost Approach is therefore born. Here, the cost to rebuild the property from scratch is calculated. By further definition, this type of approach accounts for the current cost of the land as well as costs of construction materials plus labor and more that is supplementary to replacing existing structures of the subject commercial property. The cost approach uses a very simple formula where the property value is derived from the value of the land added with the "cost to build new" and the accumulated depreciation. You may find this approach is not used very often, however, when your commercial property for sale is located in a lesser active market with data needed for all the other approaches is not as easy to collect, you may find this approach most suitable for you.
The Income Approach
The Income Approach is up on the popularity scale. This appraisal technique is most frequently used in valuing commercial property. Based on how much income you expect a particular commercial property could be making or generating in the future, this approach requires you to be familiar with Net Operating Income (NOI) and Capitalization Rate ("cap rate"). The NOI is based on the net income generated by a property minus the operating expenses before capital expenditures, debt service, and taxes come in. As for the cap rate, this refers to the ratio of the net operating income of a value on a particular property. This is used to express the anticipated Return On Investment (ROI) of the property owner for a year prior considering the capital costs, taxes, and debt service. Finding the value of your commercial property for sale using the income approach means using the formula Value = NOI/Cap Rate. While this approach may be highly popular, consider the fact that this can only be most accurate if you take caution on the inputs because miscalculations of rents or underestimations of vacancy rates, for one, could put the numbers in the result significantly inaccurate as well.
The Gross Rent Multiplier Approach
If you are looking for a simpler alternative approach to valuing your commercial property, then the Gross Rent Multiplier approach could be suitable for you. This gets the job done quickly and can give you a rough estimate of the value that you are looking for. To compute the value using the GRM, you will need to be familiar with the formula "Property Value = Annual Gross Rents x Gross Rent Multiplier", where the property that generates an annual gross rent (rental income) is multiplied by the gross rent multiplier giving you the property value you need for your commercial property for sale. Note that the difference between this approach and the income approach is that here you will use the gross income rather than the net income in calculating the value of your property.
The choice is yours to make
To sum it all up, what can be derived from the different approaches presented is the fact that valuation is driven by information – how much data you collect would have to be how much relevant valuation you could make. Bear in mind that some expert appraisers often use more than just one approach whereby taking an average of these approaches for them to determine the most significantly accurate value for the property. It could only be tough the first time. Assuring enough, the more you can get past this learning curve in making appraisals, calculating for such becomes easier the next time.
Even after outlining all the information above, valuing your commercial property for sale can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your CRE investment goals. Contact us at (480) 330-8897 or send us an email at firstname.lastname@example.org.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE