Figuring out how to price commercial property isn’t always simple, especially because there are multiple routes to doing so. Being clear on the value is important, though, as that feasible price that the property could earn in a competitive market will help encourage sellers to show interest. You don’t want to undercut yourself. Typically, we use three different methods for appraising the price of a commercial property, depending on the particulars of your investment situation. Here is how to begin to price commercial property and a breakdown of the three most common approaches for doing so.
This is sometimes otherwise known as the Capitalization Approach, but using income is one of the most commonly used approaches to price commercial property. Here we establish value by estimating the income using the capitalization, or cap for short, rate. The cap rate is the net operating income of a property divided by the current sales price of that property.
While the Income Approach can be useful for adjusting for factors like comparable sales, and it’s often used for any property that generates a predictable income, it also doesn’t take into account any future repairs or vacancies and collection loss.
The Cost Approach
Also known as the Replacement Cost Approach, this is more complicated than using the income formula. First, it takes into account the value of the land itself that the commercial property is built on. Then it factors in what the costs of creating an exact reproduction of that building would be and combined that with land value. After this, you factor in the depreciated value and adjust the property value based on that. This strategy provides a current value based on unique criteria, but it fails to account for future income or comparable property prices.
You may see this referred to as the Sales Comparison or even just the Comparable Approach. It’s probably the simplest method of all of them and just compares your commercial property to other properties that are similar in use and size within the same market as yours. From there, a range of value can be established and minor adjustments can be made depending on the condition of your building or other externalities. This is often the most simple approach because it’s so straightforward; it’s essentially what a purchaser might actually pay assuming the current market is open and competitive. It can be a good way to begin negotiations.
Trust the Professionals at Clagett Enterprises for Your Realty Needs
If you’re looking for an experienced property management company, the perfect realtor for your property, or a professional to assist you during your purchase of any home, you can rely on Clagett Enterprises. Clagett Enterprises is a full-service real estate company with almost 30 years of experience in the Frederick and Western Maryland area. For assistance with commercial sales, leasing, management, and development and consulting, contact us online or give us a call at 301-665-6009. To meet our team and see some of our beautiful homes, follow us on Facebook and Linkedin.