Commercial Property Valuation

So what is property valuation?

Commercial Property Valuation or land valuation is the process of developing an opinion of value for real property. Real estate transactions often require appraisals because they occur infrequently and every property is unique (especially their location, a key factor in valuation). Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an Appraisal reports are used to set the sale price of a property.

How To Value A Real Estate Property

Sales Comparison Approach

The sales comparison approach (SCA) is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar properties that have been sold or rented over a given time period. Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends.

The SCA relies on attributes to assign a relative price value. Price per square foot is a common and easy to understand metric that all investors can use to determine where their property should be valued.

Capital Asset Pricing Model 

The capital asset pricing model (CAPM) is a more comprehensive valuation tool for real estate. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing. This model really looks at potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk.

Income Approach

The income approach focuses on what the potential income for rental property yields relative to initial investment. The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. This rate is simply the projected annual income from the gross rent multiplier divided by the original cost or current value of the property.

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