The Essential Elements for Property Pricing
A variety of determining factors go into the appraised value or property cost if you purchase, sell or lease a commercial property. Here are the four ways to determine the appropriate value of a commercial building.
- Market Value or Sales Comparison Approach
The market value or sales comparison approach is generally one of the more straightforward methods of determining property pricing. This method accounts for other similar commercial properties in size and use. When comparing two properties, brokers, investors and appraisers consider factors such as square footage, location, surrounding land, local tax policies and other physical characteristics of said property, such as the year it was built. The sales comparison approach also heavily relies upon recent sales data from other properties with comparable locations, amenities, square footage and more.
- Capitalization Rates
The capitalization rate method (cap rate), also referred to as the income capitalization approach, is another common approach for calculating property pricing. Its primary application is for income-producing properties versus a vacant building targeted more for an “owner user” purchase/sale. The cap rate varies from one transaction to another and is essentially a non-leveraged (assumes no debt/mortgage) rate of return. This approach mathematically divides a property’s net operating income by the prevailing market cap rate for like-kind properties to derive its value. The cap rate method is a very useful tool when comparing two or more income-producing properties simultaneously that are similar property types.
- Replacement Cost Approach
Also referred to as the cost approach, the replacement cost approach is more complicated when valuing commercial properties. This valuation method examines the cost to rebuild the property from the ground up, including the current value, land, construction material, renovation cost and other costs that incur with construction projects minus the accumulated depreciation. The cost approach is practical when determining the value of a new property, a special use property or properties involved with an insurance claim.
- Gross Rent Multiplier
The Gross Rent Multiplier (GRM) valuation method compares the potential value of a property by examining how many years it would take to pay off the property based on the price of the property and its gross income (rents received). The lower the number, generally the better the investment. This property pricing valuation method is helpful to quickly shortlist desirable properties amongst many under consideration, based upon the formula. However, other valuation methods should be applied in the final analysis because it ignores a property’s operating expenses.
Most investors will have a strategic valuation method that calculates the rate of return for individual properties. However, there are often overlooked factors. TDRP has dedicated years to understanding the best evaluation methods and applications for commercial and residential properties. Tyler Duncan Realty Partners are the experts you need to engage in making a profitable investment and avoiding mistakes. Visit our website for more information on finding the perfect investment for your needs!