Whether you hope to invest in a new property or want to sell a piece of real estate to move on to new ventures, appraising your property is an essential step in that sale. Determining the value of a piece of property can help sellers determine an appropriate price and help buyers decide whether the property is a sound investment.
Methods of real estate valuation
Generally, there are three methods that an appraiser can use to determine the value of commercial property. The approach that you use will likely depend on your goal as a buyer or seller. These methods include:
- The market approach— Also called the comparison approach, this method involves comparing a piece of property to similar properties in the surrounding area. Because method uses the fair market value of property, the value of a piece of property will fluctuate along with the market.
- The income approach—This approach is often used by real estate investors to determine a property’s viability. It compares the market value of a property to the property’s potential for generating income. An appraiser can determine income by subtracting operating expenses from gross income or estimating the property’s potential rental income.
- The cost approach—The cost approach considers the land value and the value of the building itself. To determine the value of any structures built on a piece of property, the cost approach uses the cost required to replicate the structure as it is currently.
Because of the variety of methods that an appraiser can use to determine commercial real estate value, the property inspection is only one part of the appraisal process. Property taxes, income statements and a wide variety of other documents may factor into in the appraisal. By examining the market conditions, the income generated by the property and the state of both the land and the structures on it, you can achieve a more complete understanding of the property’s value.