Ohio residents interested in selling, purchasing, or investing in a commercial building rely on accurate valuation methods to ensure they are engaged in a transaction that all parties believe is fair. However, calculating a commercial property’s value is not always straightforward. There are a multitude of valuation methods that investors and sellers alike should have an in-depth understanding of to protect themselves and their finances.
What is the cost approach?
One of the most frequently used valuation techniques that commercial property investors or sellers trust is the cost approach method. Investors using this strategy will calculate the value of the land and the house separately. To accomplish this, investors determine the land’s value based on the sale price of comparable lots in the general area. Next, they will include the projected cost of rebuilding the property while considering the square footage, age, condition, and other influential factors of the home.
The cost approach is typically used when the property for sale is particularly unique, similar properties are not readily available, or the land has significantly increased in value due to added structures and renovations.
Examining the sales comparison approach
The sales comparison approach is an additional method used to determine the fair market value of a specified property. Investors will identify recently sold properties similar to the home in question to estimate an appropriate sale price. After comparable properties have been located, appraisers will compare the size, age and condition of both houses to calculate the market value.
This valuation approach is best used when an abundance of similar homes are located in the area. If no comparable properties exist, or if the home for sale is exceptionally unique, the sales comparison approach might not produce the most accurate results.
The basics of the income approach
The final valuation method that real estate appraisers and investors use is called the income approach. In general, this method calculates the value of a commercial property by determining the income generated by the building. However, appraisers must also evaluate the condition of the building as well as the efficiency. This valuation approach is often reserved for office, apartment, or retail buildings that generate income for the investor.
Investing or selling commercial real estate requires an immense amount of proactive research to make sure the final price is as close as possible to the fair market value. With a variety of valuation methods available, it can be quite challenging to understand which option will be the most accurate. To make sure a fair and precise value for the property is determined, consider working closely with a commercial real estate attorney.