Commercial properties come in all shapes and sizes so trying to figure out the property’s fair market value are a lot different from residential property estimations where you can use similar homes in the neighbourhood as a comparison model.
Commercial properties need to be evaluated differently. First, you should know the difference between the terms, “fair market value” and “market price.”
First, the term “fair market value” refers to the highest price a potential buyer would pay, and the lowest price the seller would accept. The FMV should always be viewed as an estimate. The term “market price” is the amount the property actually sells for and may be different from the FMV estimate.
There are 3 approaches used in estimating the market value of a commercial property which include:
• Market Data
• Replacement Cost
• Income Analysis
Some properties may require using all 3 to evaluate the value. Let’s briefly explain all 3 approaches which are the ones used by most commercial property appraisers.
Market Data
This method is also sometimes referred to as the “sales-comparison method” and is generally used for multifamily investment properties. The property is essentially compared to other existing and comparable properties that were sold in the previous 12 months. Price adjustments are considered with property differences.
Replacement Cost
This presumes the property can be either reproduced or replaced. To determine the price of such a property the investor would need to determine how much it would cost to replace the existing structure in terms of labour and materials. This approach is generally used when there are no comparable commercial properties available or there is no income estimate for the property.
Income Analysis
This approach is used to tie in the value of the property to any income it is likely to produce using either a GRM (Gross Rent Multiplier) or the capitalization rate which is used for larger commercial property investments.
In most instances a prospective buyer would want to use the services of an experienced commercial property appraiser before making any decisions.
