How Do You Calculate Commercial Property Value?
If you have a commercial property that you are looking to sell there are a lot of things you need to consider. One of the most important is determining how to value it properly. After all, the last thing you want to do is set a price that is too high and scares off buyers when your property is not really worth that much or set the price too low so that it makes buyers suspicious and wonder what might be wrong with it.
It’s fair to say that it has a lot to do with striking the right balance. As you are probably aware, if you want to successfully value your property, you need to arrange for an appraisal. As you may or may not be aware, there are a variety of different appraisals used commonly in the residential and commercial housing markets.
So that you are not kept in the dark, in the following post, we are going to look at the different types of appraisals when they are used and which you may choose to find out the accurate value of your commercial property.
Different Situations That Require Property Valuations and Appraisals
It is not just when a commercial property is being sold that a valuation may be requested. To help you understand this better we are going to highlight some of the key scenarios and purposes when property appraisals are necessary.
- When you want to know how much to advertise your commercial property for
- When a potential buyer wants to determine if the listed price for a commercial property is fair and if there will be room for any negotiation on that price
- When a mortgager wants to determine the price a buyer is required to pay for a property is fair
- When the government is buying commercial property to use for the public
- When a business owner needs to or wants to liquidate their business, calculate the cost of damages to the property, start renovation work or merge with one or more other companies.
Different Appraisal Methods
As we noted at the outset, working out the value of a commercial property can be simple and also complicated. This is because, just as there are different reasons for property valuations, there are also different types of property valuations.
Let’s look at the most common and why you may use them to determine how best to work out the value of your commercial property.
The simplest way to determine the value of a commercial property takes into consideration the combination of construction costs and land costs to give produce an approximate, but fair price.
By Comparison With Other Sales
Another simple, but less accurate method. This involves matching your commercial property to other buildings that have sold in the local area. It’s best to look for properties with similar square footage, rooms, floors, and parking spaces, among other features. The problem is that if your building has many unique designs or functional features, the figure calculated from this valuation should only be used as a rough estimate.
If your commercial property consists of many individual lots or apartments, this is a good method to use. For it, you need to take the cost of one lot, that is the value per door, and then multiply it by the number of spaces within that building. On the other side of things, if you are looking to figure out the value of one lot and know the value of the property as a whole, you just need to divide that number by the number of individual lots.
This method is a bit more technical and involves calculating the approximate value of the property based on the business revenue generated. To do this you need to take the net annual rental income of the property and then divide it by the estimated value of the building using the sales of similar properties in the area as a guide. This produces what is known as the capitalisation rate, or return of return. To complete the valuation, you are then simply taking the net operating income and dividing it by the capitalisation rate.
Gross Rent Multiplier
This valuation will help you figure out how long it will take to pay for the property based on the gross rental income you could generate from it. To do this, you simply need to take the rough value of the property (or the amount you borrowed or are going to borrow to purchase it) and divide it by the estimated gross annual rental income you could generate.