November 2, 2021

How to Find the Estimated Value of a Commercial Building

 
If you are in the market for a new commercial property, then you are likely considering a wide range of criteria for your next purchase. Not only do you need to consider the location and size of a commercial building, but you will also need to focus on the price point. Although there are many factors to consider, one is of particular importance: estimating the value.
 
When you are in the process of negotiating a commercial real estate deal, it is critical to be aware of the estimated value of the building that you intend to purchase. With that in mind, here are a few approaches you can take when estimating the value of a commercial building.
 

The Income Capitalization Method

 
This method of estimating the value of a commercial real estate building is perhaps the most popular option amongst investors. The income capitalization approach considers the income of the property to determine its value by utilizing the capitalization rate (otherwise known as the cap rate).
 
You can determine the cap rate of a commercial building by taking the property’s net income and dividing it by the current market value. This simple formula helps investors to easily determine a fair market value price. The income approach is a reasonable and formidable way to estimate the value of a property and is often used by both parties (the buyer and the seller) during the negotiation process.
 

Comparable Approach Method

 
If you are interested in a quick and simple way to determine a commercial property’s estimated value, then you should consider the comparable approach method. This approach is sometimes referred to as the market value approach, and it can be effortlessly carried out by either you or your commercial real estate agent.
 
In order to estimate value using this approach, you will need to run a search on comparable commercial properties that have sold in the local area within the last several weeks or months. You should only search for properties of similar size and include the same or similar features to your desired commercial building. Once you have completed this search, you can then consider the sales prices of each property to predict the worth of the commercial building you intend to purchase.
 
Despite the fact that this method is simple and easy to conduct, it tends to be less exact. This is because it determines the value based solely on the current commercial real estate market conditions – and this may not be sufficient information.
 

Cost Approach

 
The cost approach is preferred by commercial real estate investors who are looking for a more exact estimate of a property’s value. However, it can be complicated as it involves a bit of math.
 
Sometimes referred to as the replacement cost approach, this method requires you to begin by determining only the value of the land in which the property is located. Then, you must decide how much it would cost to build the existing commercial property on that piece of land and combine this with the land value. Finally, the property value is determined after depreciation costs have been deducted from the estimation.
 
No matter which approach you elect to use for your next commercial real estate deal, it’s important to carefully consider the value of the property you intend to purchase before making an offer. The current value, as well as the predicted future value, can impact your offer price significantly (either by reducing or raising it). For more information about purchasing commercial real estate, contact Rakow Commercial Realty Group today.