What You Need To Know About Appraising Commercial Real Estate

A commercial real estate appraisal, while similar in some respects to a residential real estate appraisal, really employs a very different application when using the three valuation models, including the Sales Comparison Approach, the Cost Approach and the Income Approach.

Let’s take a look at each of these, and in layman’s terms, come to understand the challenges in a commercial real estate appraisal and how valuing a commercial property is often determined.

Quite simply, an appraiser’s job is to give an unbiased and completely professional judgment on the value of a commercial real estate property. When hired, the property owner should understand that the process often takes longer and will be more detailed than analyzing a residential property. For example, although the inspection of the property is a small portion of the entire process, a commercial real estate appraiser may spend from one to several hours inspecting the subject property. Once this is completed, then the work is only just beginning. It is necessary to examine such materials such as zoning records and public ownership, gather comparable sales, study the demographic information, rentals and replacement costs. Then, the writing of the report commences. How long does this take? Anywhere from several days to longer. Each appraisal is handled completely differently because no two commercial properties are alike.

Sales Comparison Approach: This is a challenging method in determining commercial real estate value. Why? Overall, this procedure is where an appraiser studies the selling prices of comparable commercial properties to see what the market value is. The challenging part comes into play because, again, commercial properties vary and ownership does not change quickly. This is the approach used mostly for residential appraisals and is important in the commercial real estate industry as well.

Cost Approach: This can sometimes be given less emphasis because it assumes that the value and the cost to build the property (or replacement cost) is the same. Of course, this is usually not the case.

Income Approach: The best way to describe this approach is a method of determining the value of a commercial property based on opportunity cost. In other words, the net income the property in question would earn over a period of time is determined and this is based on what the future benefits or income the property will generate.

Although a commercial real estate appraisal can be complicated, for many, it can be a very good investment.