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What Is a Commercial Real Estate Appraisal?
A commercial real estate appraisal is a process that involves determining the value of a property. It is a critical part of any commercial transaction and can be used by several parties, including a lender, a borrower, or a buyer.
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The value of a commercial property is affected by the economy, supply and demand, market volatility, and the condition of your property. The appraisal may be valid for six months or longer, but it should be updated to reflect changes in the market.
How to Estimate the Value of a Commercial Property
There are a number of different approaches that can be used when estimating the value of a commercial property. Some of the most common techniques include the cost approach, the sales comparison approach, and the income approach.
Cost Approach
The cost approach estimates the value of a property based on the cost to build it. This technique is especially useful for new construction, as it accounts for all costs involved in building a commercial property. In addition, it subtracts any depreciation that the property will experience during its lifetime.
This approach is especially useful for commercial properties that have unique features, such as historic buildings or properties that have been recently renovated. In addition, the approach also takes into account any physical deterioration or functional issues that the property may have experienced over time.
Sales Comparison Approach
The sales comparison approach, or “sales comp,” method of estimating the value of a property relies on recent sale data to determine the value of your property. The appraiser will research the area and look for recently sold similar properties to help them estimate the value of your property.
These comps can be categorized by size, age, location and overall quality of the property. The appraiser will then add or subtract values based on how similar the two properties are in size, age and location.
This approach can be challenging for some commercial properties, since it requires examining sales data from several different areas to determine the most relevant comps. However, it is one of the most reliable approaches for determining the value of a commercial property.
How to Improve the Appraisal of a Commercial Property
As with any type of business, your commercial property can improve its valuation by making improvements and adding amenities. These improvements can include adding a gym, security system, or other features that attract potential tenants. They can also include allocating a portion of your property to retail establishments, which can increase your rental rates.
Income Approach
The income approach is the most commonly used technique for determining the value of a commercial building. This technique is most useful for evaluating the highest and best use of your property, which can be helpful for a number of purposes, including figuring out how much to sell it for or determining if it makes sense to rent it out.
The income approach also includes calculating a property’s capitalization rate, which is used by investors to evaluate the potential profit of a commercial building. In addition, it can be helpful for a lender when establishing a loan-to-value ratio or to calculate a property’s return on investment.
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