Property Valuations in Commercial Real Estate Deals

commercial real estate, Wheaton real estate attorneysIf you have decided to acquire any type of commercial property, it is important to be sure that the price you will pay is a fair one. Commercial real estate transactions typically involve the exchange of large amounts of money, which makes a proper valuation critical. In fact, a valuation is generally a requirement for real estate deals that are backed by lender financing.

Understanding Appraisals

A commercial property valuation is accomplished by means of an appraisal that is conducted by an approved appraiser. In order to be qualified as an appraiser, an individuals must undergo specialized education or training, and, in most cases, be certified by a professional organization of appraisers. A real estate broker is not considered to be a qualified appraiser—unless, of course, he or she has completed the necessary certification and training. Therefore, if the broker sets the initial sale price of the property, it is not necessarily backed by a qualified appraisal.

A qualified appraiser may choose from three methods of establishing a property’s value. The most appropriate method will depend on the type of property and how the property will be used in the future. An appraiser may utilize the:

  • Income capitalization method: This approach is most often used to evaluate properties that produce income, such as rental residential and commercial rental properties and shopping centers. The income capitalization method focuses on the property’s potential to generate revenue and the expected rate of return for the investor. Factors such as the condition of the property or its location are not given significant weight;
  • Sales and market comparison method: This method is commonly utilized to establish a value for single-family residential properties, but it can have commercial property applications as well. Under this approach, the appraiser will compare the recent sale prices of similar properties while taking into account the health of the local real estate market. A property sold during a boom, for example, will not be a good comparison if the market is currently slowed or depressed.
  • Cost method: The cost method takes into account the property’s value, including any improvements and the land itself and subtracts any depreciation that may have occurred. The goal is to determine if the buyer  would be better off buying the property or building a new, similar property.

In addition to being a requirement for a bank-financed transaction, appraisals are often needed for commercial real estate disputes. If the dispute reaches the courtroom, multiple appraisals may be conducted and it will be up the court to determine which value will be used in deciding the outcome of the dispute.

Call a Wheaton Real Estate Lawyer

If you are in a situation where you need a commercial property appraisal, the experienced DuPage County real estate attorneys at Stock, Carlson, Oldfield & McGrath LLC can help. We work with a network of trusted appraisers, and we will assist you in obtaining an accurate valuation of the property in question. Call 630-665-2500 for a confidential consultation today.

Sources:

https://www.investopedia.com/articles/realestate/12/real-estate-valuation.asp

https://homeguides.sfgate.com/three-methods-appraising-commercial-real-estate-value-1567.html