It would be a mistake to buy real estate – particularly commercial real estate – on a whim. It’s a major investment, so it’s vital to have a detailed valuation to know if it’s a good deal, if you should negotiate, or if it’s wiser to walk away. Conducting a commercial property valuation is also a must if you’re looking to get a mortgage to cover the initial costs and closing costs. In this article, we will tackle the various ways to conduct valuation for your commercial investment. Once you conduct a valuation, you can be one step closer to becoming a commercial real estate investor.
What Is Commercial Property Valuation and Why Do Lenders Need It?
What is commercial property valuation, anyway? In the most basic sense, commercial property valuation is a process of calculating the current value of a property based on elements such as location, condition, and more.
When getting a mortgage, your lender will want to know how much the building is or will be worth. In that way, they can check if the property is actually worth what you say it is – after all, what lender would want to lend you more than what you actually need? For example, if your commercial space has a price of $900,000 but has a value of $800,000, they’ll only let you borrow $800,000.
Commercial property valuation also enables lenders to avoid certain properties that may not be in their best interests. Remember, if you can no longer pay your mortgage, your property will be your lender’s problem. They’ll have to sell your property to cover the unpaid amount, so of course, they’d prefer to lend only to investors with easy-to-sell properties.
A Property’s Value and Cost Are Not the Same
It’s worth noting that a property’s price tag or purchase price is not synonymous with its value. The price tag is simply the amount the seller puts on the property. While the purchase price is based on the property’s value, it tends to be inflated as sellers will want to stretch their profits.
This is one of the reasons why lenders want to do their own valuation of the property you want to purchase. Commercial property valuation provides them with confirmation that you’re paying the right price for the property. If there’s a gap between the price tag and the value, there’s a good chance your lender won’t lend you what you need.
For that reason, it’s important to look into the price of properties in the area you plan to invest in. In that way, you’ll have an indication of how much your prospective property is actually worth. You can make sure you pay a fair price. If you aren’t sure where to find the fair market value of a prospective property, consider consulting a commercial property management firm.
How Is Commercial Property Valuation Calculated?
Commercial property valuation can be calculated in more ways than one. While you won’t have to calculate it yourself because a surveyor will usually do that for you, it can be helpful to have an idea of how they’ll arrive at a number. Let’s go over the various ways to calculate the value of commercial real estate:
1 Cost Approach
In this method, the goal is to compare the costs of purchasing a commercial property to the cost of constructing one from scratch. It also considers the value of the land when estimating the cost to construct a new property. The cost approach is often applied when comparable properties are hard to find, such as when the property has one-of-a-kind features.
2 Sales Comparison Approach
The sales comparison approach (also known as the “market approach”) takes into account the most up-to-date sales data of similar properties. It considers the price tag of commercial properties that are similar to yours to get a close estimate of your property’s value. If your prospective property is a shopping center, it would make sense to look at the prices of other shopping centers in the vicinity.
3 Income Capitalization Approach
This commercial property valuation method examines the income you can expect to make from a particular property. To calculate the value, all you have to do is put a figure on your future revenue, and then deduct the costs you’ll incur (e.g. maintenance, property management fees, etc.). Be sure to consider the inevitable loss of income due to vacancies. Apart from the projected income, it also considers the property’s potential resale value.
4 Value Per Gross Rent Multiplier
The Gross Rent Multiplier (GRM) method is similar to the income approach. However, the difference is that the GRM uses the gross rent. With that said, you must first find out what the gross rend and GRM are for comparable properties nearby. You can obtain this information from a real estate professional such as a real estate agent or property management firm.
5 Value Per Door
This method mainly applies to apartments as big residential buildings are actually considered commercial real estate. The value per door (VPD) method determines the value based on the number of units. For example, let’s say a neighboring 20-unit building has a value of $5,000,000 – that’s about $250,000 per door. You can then use that data on your potential property. That means if you plan to purchase a 10-unit building, you’d pay more or less $2,500,000 for it ($250,000 x 10 units).
Consult the Investment Experts at Luxury Property Care
A valuation is a vital step in getting a mortgage for your commercial property. Without one, there’s a low chance your lender will approve your loan application. If you’re having a hard time navigating the world of valuations, it’s a good idea to consult an expert company such as Luxury Property Care. Not only will we provide you with investment advice, but we’ll also guide you through the mortgage process so you can add your commercial property to your portfolio in no time.