Finding the appropriate value for your commercial property is important in determining the right value at which you want to buy or sell a property.
Overpaying for your property or underselling your property can both be expensive mistakes. Thus, finding the right value for your commercial property is crucial.
This blog will help you to determine the worth of your commercial real estate property. Before moving on with discussing the ways through which you can arrive at a value that determines the worth of your commercial real estate property, let us first understand the various ways in which commercial real estate investments are valued.
Valuation of commercial real estate investments
There are two major ways of valuing commercial real estate investments. Both of them are important in determining the right worth of your commercial real estate property and they can vary from each other.
These values cater to the varying needs of an appraiser, buyer or a seller and each interested party might arrive at a different price for the same building or property.
The end goal is to understand the valuation techniques or procedures so you get a fair idea of what the other party is expecting, whether you are an appraiser, buyer of a seller. So, the two major ways of evaluating the worth of commercial properties are:
1) Market values
2) Assessed values
Understanding the valuation techniques and factors that determine both the above mention values is important before deciding upon the best type of valuation. Read on.
1) Commercial property market value
Commercial property market values are the rough values that are associated with a property based on both the holding value and sale value of a property.
Remember that the holding value of a property can vary largely from the sale value of a property, as a result of the combined effect of a lot of factors that come into the picture.
In other words, Commercial property market values are largely in tune with a property’s real value and the perceived value. It may not always be the average of the two values and can be leaning towards one value more than the other. Some of the factors that influence the total market value of a commercial property are:
• Building size and condition – the first things that will influence the market value of a commercial property is the building space and the condition of the building – how old is the building, will the building need repairs and renovations to enhance its living in conditions, the interiors and exteriors done to the building, the aesthetics of the building and so on.
• Proximity to jobs, transportation, major cities, shopping malls, schools and colleges and other major attractions – the next set of things that determine the market value of a property is the proximity of the building to companies that are providing jobs, to the major cities in the state, shopping malls, etc. The properties that have the closest proximities to such elements offer to carry a high market value, even if the building condition in itself isn’t off the charts.
• Current market demand for the property – the next thing that influences a property’s market value is the current market demand for the property. There can be cases where the intrinsic value of a property isn’t high, but due to the high market demand in the locality for such properties, the overall price of a commercial property shoots up. This might also work the other way around where the intrinsic value of a property may be very high, but the seller settles down for a lower valuation of the property due to low market demand.
• Values of similar properties in the locality – the market values of the properties that are similar in terms of the size and construction elements also determine the overall market value of a property.
The aesthetics of a particular property might thus not really add up to a high value of the property, if the market value of such similar properties isn’t high because at the end of the day, most buyers are looking at the market rates and great aesthetics might not always provide any return on investment, unless the buyer genuinely wants to buy a property that is great at providing an aesthetic beauty, which in most cases might be applicable to residential properties and not commercial properties.
2) Commercial property assessed value
The second method of evaluating Commercial properties is by the assessed values. These are the values that are assessed by the tax professionals, belonging to a particular bounty who assess the value of a commercial property from time to time to determine the dues payable as part of land and property taxes.
Assessed values of the properties are generally more rooted to the current, hard property values based on more practical determinants like – size and space of the property, values of repairs and renovations made to the property, interiors of the property, potential income from the ownership and so on.
Bottom line, the commercial property assessed value is based on the higher-level market influencers and thus these values are less likely to fluctuate from year to year.
Thus, the assessed values are often used as a yardstick to determine if the market value of the property has been misguided or not. These rates provide the basic worth of a property and thus provides a starting line of any further negotiations and considerations.
They are the two major ways through which the worth of a commercial property is calculated. Moving on, here are some ways through which you can get a clearer picture of what’s the worth of your commercial property.
1) Run a detailed check through a couple of websites
The easiest and the fastest way to arrive at a base price which talks about the worth of your property is by running a check through a couple of websites online.
There are hundreds of websites that provide the values of properties, including the comparable values varying from one location to another.
You might be interested in a particular property, and even if you don’t find that particular property listed on any of these websites, chances are you will find some similar properties and that can help you with coming up with a base value of your property.
2) Get in touch with real estate agents who have had good experience with Commercial real estate investing
More often than not, the real estate agents are experts in determining the value of a commercial property. Their huge experience and expertise in the field help them derive at an estimated value, that can provide you a basis value at which your commercial property may be valued.
In fact, there are many real estate agencies that can provide you a very close to accurate values for your properties and knowing these values in prior may help you come up with a better pitch or draw a better sales proposition when you are closing the deal.
3) Asking around in the neighborhood
It goes unsaid that one of the most common ways to determine the value of your commercial property would be to ask around in the neighborhood.
The people living in the neighborhood will have a rough estimate as to what would the property be worth, based on the values of the property they own themselves in the same neighborhood.
The figure arrived at by these locals of the neighborhood will be close to the market value of the property as these values are hugely influenced by the proximity of the property to other major cities, hospitals, and schools, companies, shopping malls, etc.
4) Checking the values with commercial real estate lenders
Commercial real estate loan lenders will have an idea about the valuation of the properties too, owing to their huge experience and expertise.
Since they deal with providing Commercial real estate loans to fund the commercial real estate investing needs of borrowers, they understand a great deal about the valuation of a property.
The Loan to Value ratios too, which they deal with on a regular basis, helps them have a rough idea about an estimated value a commercial property would be worthy of.
5) Hiring certified real estate valuation experts
Last but not least on the list are certified real estate valuation experts. These experts may be working for government real estate agencies or traditional banks or at a private commercial real estate agency.
They are the experts in the field and can accurately determine the truest worth of a commercial property. Most real estate investors rely on the values determined by the certified experts as they provide the best values of the property, without being biased towards any of the parties involved.
These are some of the commonly used ways to determine the worth of your commercial real estate property. In most cases, savvy commercial real estate investors use a combination of all these methods to determine the apt worth of their property and use them during their negotiation.
If you want to negotiate your deal in a way that it works out in your best interests, it’s always a good idea to have in mind the various values of the property determined in different ways by a different set of people!
It helps create a pool of opportunities for you to provide great offers or counter-offers whilst being reasonable.