How Do The Different Commercial Appraisal Methods Work?
Posted on: 28 February 2022
If you're trying to get a commercial real estate appraisal done, it's important to understand that there are different methods of appraisal. Each method looks at different things, so it's possible that each method could give a different value for the property. Here are the different methods and how they work.
Income Method
The income method looks at how much money a commercial real estate property generates. This method works best when the building owner leases it out to tenants. The income is the rent received minus the costs of marketing and maintaining the building.
The building's value is usually a certain number of years worth of income. For example, if the appraiser is using ten years and the building gets $1 million per year in rent, the building is worth $10 million. The number of years the appraiser uses depends on a number of factors, including the type of building and the local market.
This is a common method to use because it's the same way that many businesses get valued. Since commercial real estate is an investment just like buying a business, investors are comfortable with this type of valuation, and it gives them an accurate picture of their potential return on investment.
Sales Comparison Method
In the sales comparison method, the appraiser looks at what similar properties are sold for. This method usually works better for houses because there are often many nearly identical houses in a small area.
In commercial real estate, buildings have more differences. The appraiser may not be able to find identical buildings in the same area. They'll need to look at similar properties and make estimates about how different sizes and features affect the value. They may also look at identical properties in other areas to better inform their estimates.
Cost Method
In the cost method, the appraiser tries to figure out what it would cost to build an identical property. This includes buying the land and then the costs of construction of the building. If the appraiser is looking at an old building, they might adjust the price down to account for depreciation.
This method works best in areas with a lot of room to grow. Otherwise, the only available land might be far away from the building being appraised. Building new nearby would mean buying existing land at a premium, tearing down the existing buildings, and then rebuilding.
To learn more about commercial real estate appraisals, contact a local appraiser today.
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