Multiple methods are often utilized to determine the value of commercial property.
The three most common methods are the income approach, the market approach, and the cost approach.
The income approach is the most commonly used method to value commercial property. It uses the income generated by the property to estimate value. Two factors are used:
The value is calculated by dividing the net operating income (NOI) by the capitalization rate:
Value = NOI / Cap Rate
Tip: The higher the cap rate, the lower the property price.
The market approach analyzes actual comparable property sales (comps) and is the most commonly used method to value residential property. It is also used for commercial property. This approach does not account for deferred maintenance, vacancies, or lost collections.
Tip: Make sure comps are comparable and not selected to distort value.
The cost approach estimates value based upon how much it would cost to build. This method includes the value of land, construction materials, permits, and labor.
Tip: Keep in mind that construction projects often run over budget.
Are you curious about how much your commercial property is worth? Evan Meyer is an experienced and qualified broker who is willing to provide a Broker Price Opinion (BPO) at no cost to you.
