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In cases where a commercial property is to be sold, the same has to be ‘Appraised’. An Appraisal is a process by which the value of a property is ascertained for further use. It a formal process and a professional Appraiser can do it. There are whole lot of factors that determine the value of a commercial property and these factors are dynamic and keep changing over time.
You are reading: Methods of Appraisal Of Commercial Property
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An owner or a manager who is willing to sell off commercial property or an entrepreneur who is willing to buy and start business from a premises must be able to find out the exact value of the property so that further actions can be taken on the piece of land or the building. An Appraisal can be carried out by the seller or the buyer of the property. There are several different circumstances under which an appraisal may become necessary. Here are the main methods of Appraisal of a commercial property:
1 Cost Method: This is one of the oldest and simplest ways of Appraising a commercial property. According to this method, the value of a property is equal to the expenses that will be incurred to replicate the building exactly. There are certain adjustments like deprecation and land value increase or decrease. In high growth localities or in areas of high commercial property density, the land value will be huge part of the overall value of the property. There will be some value assigned to the structure also but its the land value which comprises most of the value of the commercial property under this method.
2 Market Approach: The market approach is a slightly complex method of appraisal of a commercial property than the first method. In this method, a deeper study of the similar building and land parcels in the neighbourhood is conducted so as to determine the value of the property in question. The value of the similar properties is generally taken to be the value of the property in question and it does not matter which method has been applied for valuation of other building in the neighbourhood. This method of valuation is subject to greater fluctuations whenever there is any change in the dynamics of the locality like connectivity and growth.
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3 Income Capitalisation Approach: Under this method of appraisal, the net operating income of the property is divided by the appraiser by its current market value. This is one of the latest methods of appraisal and overcomes the shortcomings of the other two methods. By this method, the buyer of the property can get a fair idea whether to invest in this property or not depending on his/her own income expectations and standards. It is assumed under this method that the property will give positive cash flow in future.
While all the three methods for appraisal of a commercial property are viable, a combination of appraisal methods are used to arrive at the correct value and the appraiser is often required to carry out valuation based on all three methods.
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