Property appraisal or valuation is the procedure of getting a property’s value evaluated. The appraisals are necessary for determining sales, mortgages, mergers and tax purposes, among others. Appraisals are done by appraisers or values since the market value of the property is not the price of the property when it was bought. There are other factors that add up to the property’s worth. This is what a professional real estate appraisers or valuers gauge.
If you are getting your property appraised, know that there are three main methods for doing the appraisals. The appraisal method depends on various factors such as location, earning potential and other circumstances. Understanding how your property is being appraised would give you a more active role in the process.
Income Capitalization Method
Perhaps the most common method employed when it comes to commercial property. This method does not only gauge the property’s market value from its current value but also the expected profit the property would bring in the future. Properties being appraised using this method are usually hot commodities because of their prime location. This includes commercial real estate northern beaches coastal suburbs or property in the heart of a city. They can also be near schools and universities, which are valued because of their capacity to generate cash flow and an ability to provide a return on its investment and expenses incurred.
Sales Comparison Method
Sales Comparison Method on the other hand and based on the name itself is a method that involves looking at same properties (same features, same type and same market) and inferring the property’s value from the sale information of the same property. Also referred to as the market data approach, the properties to be compared should be similar in all sense. This is the reason why this approach is sometimes unreliable since some of the factors are not considered. However, if this approach is to be used in conjunction with the other appraisal methods, the data collected would be more predictable since past sales of the same property have been successful.
The Cost Method
Perhaps the most obscure means of gauging a property’s value, the Cost Method would appraise the property’s commercial value as equivalent to the cost of the property’s construction or the cost of its replacement. With this method, the buyer of the property would not pay anything more than what the seller spent when the property was bought even if the property is situated in a prime location and the possibility of cash flow in the future is very likely.
An appraiser could use any of the above-mentioned methods though they generally use a combination of the methods to properly gauge the property’s market value. The appraiser also put into consideration the type of buyer to provide the seller with an analysis that the potential buyer would easily understand. An appraiser’s report could at times be the deciding factor whether a deal would be closed or not. These are just some of the indicators that the appraiser consider before they could derive a final conclusion regarding the commercial property’s market value.