A real estate valuation is a necessary step in determining the actual worth of a property. It is particularly useful when buying, selling, refinancing or underwriting a commercial building, because the valuation sets a probable price for an asset on today’s open market.
For example, a fair market or investment valuation could help you to figure out whether it is worth it to make improvements on a property before placing it on the market. Depending on your needs, there are two common methods that typically work the best.
Two Generally Accepted Methods of Real Estate Valuation
The fair market and investment methods of real estate valuation are two options available in the assessment of commercial property value. Although these two methods can be easily confused, there are several key differences that set them apart.
What is Fair Market Value?
Fair market value is, quite simply, the price that a property would likely sell for on the open market. It is a term that is commonly used in both commercial and residential real estate valuation.
The fair market value of a property, which is usually determined by an appraiser, is calculated relative to other properties in the area and the neighborhood where it is located. Other factors that are considered in the process include square footage, number of floors and amenities.
The commercial real estate taxes are then based on an appraiser’s fair market value.
What is Investment Value?
Investment value is a more hypothetical approach to valuation that is widely accepted in the commercial real estate industry.
It is calculated based on various different assumptions made by buyers or sellers, including:
- Cash flow estimates
- Tax rates
- Financing capabilities
- Business strengths
- Value of intangibles
- Expected return
However, final assessment values may vary, according to the underlying assets being analyzed by commercial real estate estimators.
A Tailored Approach to Commercial Appraisals
In addition to these two common real estate valuation methods, some investors and property owners use other formulas, such as insurable value, assessed value, liquidation value or replacement value. All of these methods of valuation can be used during a commercial appraisal.
Whether you need a current valuation for asset management, financing or acquisition purposes, you can count on the experts at KTR Real Estate Advisors. Contact us today for more information about the commercial appraisal process.