HOW TO DETERMINE THE FAIR MARKET VALUE OF COMMERCIAL PROPERTY
Determining the fair market value of commercial property is an essential step in buying or selling a property. It is the price that the property would sell for on the open market, with both the buyer and seller having reasonable knowledge of the property’s characteristics, and neither being under any pressure to buy or sell.
There are several methods to determine the fair market value of commercial property, including the income approach, the sales comparison approach, and the cost approach. Let’s take a closer look at each of these methods.
Income Approach
The income approach is the most common method used to determine the fair market value of commercial property. This approach is based on the income that the property generates. The income is calculated by taking the annual rent and subtracting the operating expenses, such as property taxes, insurance, and maintenance costs.
The net operating income (NOI) is then divided by the capitalization rate to determine the property’s value. The capitalization rate is a percentage that represents the return on investment that an investor expects to receive from the property. This rate is determined by looking at similar properties in the area and considering market conditions.
Sales Comparison Approach
The sales comparison approach is another method used to determine the fair market value of commercial property. This approach compares the property to similar properties that have recently sold in the area. The sale prices of these properties are adjusted based on differences in size, location, condition, and other factors.
The adjusted sale prices are then used to determine a price per square foot or unit of measurement. This price is then applied to the commercial property being evaluated to determine its value.
Cost Approach
The cost approach is a method that determines the value of the property by calculating the cost of replacing the property with a similar property. This approach is used when there are no similar properties that have recently sold in the area, or when the property is unique.
The cost approach considers the cost of the land, the cost of building the property, and the cost of any improvements that have been made to the property. The value of the land is determined by looking at similar properties in the area and considering market conditions. The cost of building the property is determined by looking at the cost of materials, labor, and other factors.
Once the cost of the property has been determined, depreciation is factored in to adjust for any wear and tear on the property. The resulting value is then used to determine the fair market value of the commercial property.
Conclusion
Determining the fair market value of commercial property is essential to making informed buying and selling decisions. It is important to consider multiple methods when evaluating a property to get a more accurate assessment of its value. By using the income approach, sales comparison approach, and cost approach, you can make informed decisions and ensure that you are getting a fair deal on your commercial property.
