Very few individuals possess knowledge about the appraised value of a commercial property. Many hold assumptions that are wrong and could work against the owner’s interests. Resources are aplenty online and offer a correct assessment of the value. However, it is essential to rely on multiple inputs, including online resources, to reflect the actual cost.
Various parameters are taken into consideration when arriving at the value of the property. Incorrect assessments are often based on relying on fewer settings for appraisal of the property. Here are practical methods that will help correctly assess a commercial property’s value, which can then be used to get a better deal during borrowings, sale, or lease.
Various approaches to Determine Commercial Property’s Cost
Before we look at the best methods for appraisal of the property, here is a quick overview of the various approaches typically used for assessment.
Calculation based on an area that can be rented out
Even though this is not a scientific method of valuation, this method is based on possible earnings. This is close to market valuations and can offer a quick reference to the rates. For instance, if you are aware of the prevailing per square foot rates for rentals of commercial properties in the same area, you can get a reasonably good idea of the property’s value.
This is not a simple calculation but requires the property owner to work out only the rentable area, leaving out spaces that do not count as rentable. This is more of a reverse calculation of the Gross Rent Multiplier Formula.
Gross Rent Multiplier
Commercial properties earn rental income to the owners. The cost of the ownership at the time of purchase, divided by the rentals made annually, gives a percentage. This number is more of a categorization value. For instance, properties that return a higher rate are perceived as having relatively lesser value than the property’s cost.
Wherever the formula returns a lower value, it effectively means that the property has higher commercial value.
This is, as mentioned, more useful to determine if the property is right in fetching returns.
This is for all practical purposes, the standard method used by individuals who do not have other assessment methods. Most homeowners tend to compare the cost of a property similar in size and category in the same area to arrive at the property’s value in possession. While this can help get a ballpark estimate, it can be a flawed method.
It is almost nearly impossible to find a commercial property that is similar in all aspects. Most importantly, the comparison has to be in the same time period when the market conditions are the same.
Simple valuation through costs
Another straightforward valuation is to consider all the various costs associated with an existing property as on present market rates. For instance, the cost of land is calculated based on prevailing market rates. Similarly, the cost of various materials and other expenses is calculated based on prevailing market rates to arrive at the total costs. This approach needs multiple inputs, and the assessed value depends on the accuracy of all the data.
This method is another straightforward option wherein the assessment is based entirely on the property’s projected income. This is again more of comparison as the projections are based on inputs about earnings from similar properties. The screenings also take into account expected cost-cutting measures and improvisations to improve the potential for profits.
Valuation of commercial properties is carried out differently, and it is essential to get a value that is as close as possible to the actual value. Depending on how the various parameters are evaluated and the actual inputs used, you could get a reasonably good estimate.
How Various Factors Influence the Rates of Properties?
As shown above, two different components determine the value of a property – market value and assessed value. The market value is subject to various factors, some of which could be in a state of change. For instance, new additions in civic amenities/infrastructure or other locality improvements can significantly alter the land value in an area.
Similarly, an adverse condition can negatively impact the value of the property. Therefore, market value can be broadly labeled as a combination of market influences and comparative costs. The index is often a relative cost that is then scaled up or down according to the property’s size. The value of the latest feature in the same area with similarities becomes the index for the next property or becomes part of an assessment index.
The demand for property in a particular area is a significant influence on the costs. This is again driven by market factors and can cause a massive spike in a property’s prices. Similarly, adverse conditions can severely impact the demand for prime estate.
One of the unusual factors that affect properties’ market value is the proximity to the offices of premier educational institutions. The market value of such properties typically witnesses a consistent increase in value along with demand.
How does the Assessed Value of Property Differ?
The assessed value of properties does not fluctuate as much as market value. This is primarily because the assessed value is the value in black and white, which is used for taxation. A quick comparison of Commercial Real Estate data reveals this vital difference.
Both the values are basically different components and have specific uses. Therefore, it is wrong to assume that an average of both will help arrive at the property’s value.
The market value is intended to know how much is to be paid or received for the property. The assessed value is for taxation and considers the assessed land value, the assessed value of various immovable assets in the land, and the possible capitalization.
Professional Assessment of Properties
Expert evaluation of properties is effectively the best way to determine the value of the property. There is a massive difference between evaluations carried out by individuals with limited resources and evaluations carried out by professionals with access to historical data and market data. Commercial real estate consultants have complete information about the trends in a particular area and the demand for properties. This information helps in a proper appraisal that allows fixing a precise value for the property.
The use of professionals helps property owners gain complete information that will also be important as input for decision-making. For instance, properties typically considered to be of value may experience a sudden dip in the value due to market influences. Based on the inputs and the data from historical records, the assessor is better placed to offer valuable advice to the property owner.
The owner can then place his decision o hold for a certain period till market conditions are favorable. This could be either to avail a commercial real estate loan or to dispose of the property. The value of the property influences the amount in the sale of a property or borrowings. It is, therefore, advisable to make a decision based on inputs about favorable conditions.
These inputs may not be discernible from simple online resources that offer a valuation based on broad criteria like locality or property dimensions. It requires a professional assessment based on various parameters and access to historical data.