Methods Used In Commercial Property Valuation

Assessing the value of a commercial property is no easy task. There are many factors to consider such as the location of the property, and what similar businesses are nearby. Will a competitor cut into any potential business you were hoping to get? Should you tear down the building already on the land and start from scratch? Will you make more money with a completely new building?

So who makes these decisions? What kind of methods do they use to determine the worth of property?

In a perfect world, one might imagine an assessor coming out to the property with a little clipboard and taking notes about the condition of the land or business. Once done, they type up a note with a number on it and viola! You’re done. Unfortunately, it’s not quite that simple. The methods used to determine the value of the commercial property are a slightly more complicated process.

Method 1: Income Capitalization

This approach is used to determine how much possible income might come from this business based on things like its location and business type. There would also have to be research done regarding how other establishments in that area are doing. Are they cost-effective? Are they bringing in money or are they losing it? Whether its part of a house valuation Sydney or a commercial valuation in another city, being able to diagnose the possible debt to income ratio for future business is crucial in determining the value of any new venture.

Method 2: Should You Tear The Building Down?

How much would it cost to simply tear down whatever is already on the property and rebuild everything from scratch? Just like in a house valuation, the assessor will determine what the next step should be.  If a commercial property is in the kind of disrepair that would be too costly to fix, a demolition approach might be more effective. It should be noted that this tends to be the most cost-effective when evaluating a newer building as opposed to an older one.

Method 3: Comparing Sales

If you were going to buy a home, you’d be likely interested in knowing how much a house in the same neighborhood is selling for. The same is true for commercial property. One way to determine property valuation is by seeing what other businesses in the area have sold for.  Those sell act like a baseline and will show a seller how high or low they should set their asking price for. This helps an assessor know how much a potential buyer could make and how easily they would be able to pay on their loans.

Which Approach Is The Best?

All of these approaches have value. It depends on what you are looking for and the location you are interested in. House and commercial property valuation vary in different countries and different states. Find a realtor who can help guide you through the process of choosing a commercial or residential property.

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