Appraisals are a critical part of commercial real estate transactions because they determine the value of the land or property. Real estate appraisers are professionals who evaluate properties and provide estimates of their worth. There are three approaches that are commonly used for a commercial property appraisal. – the cost approach, the sales approach, and the income approach.
Real estate appraisals are a complicated and detailed process that relies on an appraiser’s knowledge of the marketplace and the specific property for purchase. It’s not an exact science and includes some subjective decisions. The property buyer needs to have a thorough understanding of the market in the area. The best way to make sure your information is accurate and up-to-date, is to work with an experienced and knowledgeable real estate professional who will stay by your side through the buying process.
The cost approach is considered the most accurate appraisal of new construction and commercial properties. Through this process, the appraiser works to determine the market value, including the assumption that the property’s value equals the cost to replace it, minus accrued depreciation. Here is an overview of the cost approach steps:
The sales comparison approach, or market approach, is one of the most common appraisal methods. This technique considers recent sales of comparable properties in the marketplace. Price per square foot, acres, rooms, units, income multipliers, and overall rates are included to help determine the estimated commercial property value. These are the steps of the sales comparison method:
The sales comparison approach requires a thorough examination of comparable properties and a level of subjective decision-making to make an accurate analysis of the market value.
The income capitalization approach is an additional appraisal technique. It considers the income potential of the property based on net profit, residual equity buildup, and stabilization. This approach requires the appraiser have a thorough knowledge of the marketplace and the expected cash flow of the property. It may take into consideration the current positive or negative cash flow.
After the three approaches are concluded, reconciliation begins. The commercial appraiser evaluates the quantity and quality of available data and chooses an approach to feature as the most accurate to determine the estimated market value. Then the buyer receives the completed appraisal documentation.
With over 60 years of combined real estate experience, Ullian Realty is thoroughly knowledgeable in commercial and industrial property in the Brevard County marketplace. We provide services for all your real estate needs. Contact us today to set an appointment to discuss your next commercial property investment.
Editor’s Note: This content was originally published on March 1, 2018, and has been updated for freshness and accuracy.
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