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The Differences Between Commercial Real Estate Appraisal Methods

The Differences Between Commercial Real Estate Appraisal Methods

Appraising the value of something may seem straightforward at first glance, but the truth is that there’s a lot of work behind it. This is especially true for more nuanced items like property or commercial equipment where many factors can both add or subtract value depending on multiple variables. For instance, to find out how close a commercial real estate appraisal is to the sale price appraisers use several methods.

We detail each of the methods below.

How Close Is Commercial Real Estate Appraisal to Sale Price When the Value Per Unit Method Is Used?

The value per unit method is usually reserved for skyscrapers or condo buildings where there are a large number of units on the property. This is because the value of the location is appraised based on the number of units, no matter the size of the building.

What Is the Cost Per Square Foot Method?

Since space matters for commercial real estate, appraisers can use the cost per square foot method to evaluate a property based on the square footage.

It’s calculated by taking the price per square foot and multiplying it by the total square footage. Included in the total square footage of this calculation are also all usable areas, including stairwells and elevators.

Once again, this method is best used for larger buildings.

How Does the Cost Approach Work for Commercial Appraisals?

When a property has unique features or upgraded structures like those designed with “green” improvements, the cost approach works best.

Properties are appraised through this method by using the costs of the current land value, construction materials, and replacement value into consideration.

Alberta farm after real estate appraisal

What Is the Direct Comparison Approach in Appraisals?

The direct comparison approach is used in appraisals by calculating the value of a property based on the sales value of similar properties. However, this method works best when there are many properties of similar types in the same area and can be difficult when there isn’t as much data on comparable properties.

What Is Detailed in the Income Capitalization Approach?

Finally, the last approach is one that’s heavily reliant on future estimations. It’s based on the projected net income of the property based on local market research. This approach is best used for farms and other industrial real estate.

All these approaches and methods are taken into consideration by an accredited appraisal to offer the most sound evaluation of the value of a property.



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