A commercial property appraisal uses a different process than a residential appraisal. In Florida, the law requires a licensed appraiser that works independently to complete the process. There are three approaches that are commonly used for commercial property appraisal. The cost approach, sales approach, and income approach. The final step to complete the commercial property appraisal is to reconcile the approaches with a list of other determining factors.
A property appraisal is 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. It’s important for the property buyer to have a thorough understanding of the community. 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.
Here is a broad overview of a property appraisal process:
The cost approach is considered most accurate with 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.
Overview of the Cost Approach Steps:
- The value of the land is estimated when used most profitably.
- The cost of replacement plus the entrepreneur’s profit and development costs are estimated.
- Depreciation is estimated next. Both curable and incurable aspects are noted.
- Land value is added to the contributory value of improvements for the estimated market value.
Sales Comparison Approach
The sales comparison approach considers recent sales of comparable properties in the marketplace. Price per square foot, acres, rooms, units, or income multipliers and overall rates are included to help determine the estimated commercial property value. This requires comparing exact spaces.
Overview of the Sales Comparison Approach Steps:
- Define how to classify the property.
- Find comparable properties and determine comparable factors.
- Determine tangible and intangible differences in comparable properties.
- Determine an average value.
The sales comparison approach requires a thorough examination of comparable properties and a level of subjective decision-making to determine an estimated market value.
Income Capitalization Approach
The income capitalization approach considers the earning potential of the property based on net income, 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, if available.
After the three approaches are concluded, reconciliation begins. The 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 50 years of combined real estate experience, Ullian Realty is thoroughly knowledgeable in commercial/industrial property specifically in the Brevard County marketplace of Melbourne, Palm Bay, Viera, Rockledge, Cocoa, and Titusville. Contact us today to set an appointment to discuss your next commercial property purchase.
Read more about the commercial property loan application process here.