Whether you’re looking into buying or selling commercial real estate property, it’s essential to correctly identify the value of your property.
As a buyer, it is important to ensure that you’re not paying more than you should be above what the property is worth. In today’s market, this is more challenging than ever because the competition is fierce for the reduced inventory of available commercial real estate.
From the perspective of a seller, you want to be sure to properly evaluate the value of your property to ensure that your asking price is in line with market values and attracts the right buyers.
There are a variety of options available when identifying the best way to determine the value of a commercial property:
Income Capitalization Approach
The Income Approach is often the most commonly utilized method in the commercial real estate market. This method uses the capitalization rate, or cap rate, to determine the property’s value. The cap rate is identified by taking the net operating income divided by its current market value.
To properly take an income capitalization approach, you will want to work with a CRE broker to get further insights into market factors and trends that can affect your market valuation. As a tool, we also offer a cap rate calculator to estimate your market value price. Simply input your net operating income and cap rate percentage to determine the market value of your property.
To calculate NOI, subtract all operating expenses incurred on a property from all revenue generated on the property.
Cost Approach
More formally known as the Replacement Cost Approach, this approach is significantly more complex than the previously mentioned option. This approach first reviews the price of the land on which the building sits, not including the building. Then, it involves considering how much it would cost to rebuild the exact building as if it were being built from the ground up. Finally, it considers depreciation of the existing building, and the actual value is calculated accordingly.
Market Value Approach
The Market Value Approach is often considered the simplest means by which to calculate the value of a real estate property. This approach involves reviewing nearby properties with similar factors and comparing their values and prices. Some factors that may be considered under this approach include a property’s size, location, age, surrounding land, tax properties, and more.
This approach helps identify what a buyer in that area and under similar conditions may be likely to pay in simpler terms.
For properties that are unique in size, land acreage, or usage, this method is ineffective as it relies on similar properties for “comp”s or comparisons.
In many cases, buyers and sellers may utilize a combination of multiple of these approaches to identify the true value of a property. The right answer depends on many factors, working with an experienced broker is the best solution in these high-value transactions.
Our team at Innovative Capital Corporation has significant experience in helping support the acquisition or refinancing of commercial real estate. A critical aspect of doing so involves making sure that properties are correctly valued. If you’re in the market to acquire a commercial real estate property and are looking for lending support and guidance, contact our team today.