The primary role of a commercial real estate appraiser is to determine a multiunit residential, retail, office, or industrial property's value. After checking a property's specs and investigating it in person, they may use several ways to determine its value. Here are two of the main methods that commercial real estate appraisers use to determine how much properties are worth.
1. Sales Comparison Method
The sales comparison method is a straightforward way to value commercial real estate. The appraiser compiles a profile of the property that's being appraised and then researches similar properties that have recently sold.
Because no two commercial properties are identical, a consistent metric is used to determine value. This metric is often square footage for retail, office, and industrial spaces. A per-unit price is more often used for multifamily residential properties.
Consider a multifamily property that has 100 units as an example, and assume two similar properties recently sold. One property had 65 units and sold for $8,125,000. The other property had 150 units and sold for $11,250,000. The per-unit price of the first property was $125,000, and the per-unit price of the second property was $75,000.
In this example, the average per-unit price of similar properties averages out to $100,000. The 100-unit property that's being appraised might have an expected value of $1,000,000 and a potential range of $750,000 to 1,250,000.
When the sales comparison method is viable, it's an accurate and easy way to determine value. The local area must have similar properties that were recently sold for this method to be viable, however. It may not be an option if a property is particularly unique, the property is located in a rural area, or the commercial real estate market has experienced a lull.
2. Income Method
When they use the income method, commercial real estate appraisers don't directly consider the value of nearby properties. Instead, they focus on the potential income that the property being appraised could generate. Appraisers might look at other properties to see what going lease rates are, but that's about the extent of what they'll use other properties for.
Once the income potential is estimated, a multiplier is used to determine the property's value. The annual income multiplied by a certain rate equals the appraised value. A commercial real estate appraiser will know what multiple is appropriate for a given type of property, as the number depends on multiple factors.Share