How to Determine the True Worth of a Commercial Property

Did you know that when it comes to determining the true worth of commercial property, there is a difference between market value and investment value? This is true, there IS a difference. In order to understand this concept it is necessary to first understand the different commercial property value in existence. In this article we will briefly discuss these in addition to some other valuation factors.

“Market value is what’s typically meant when referring to a property’s value and is the value used for loan underwriting purposes.” Market value is used to estimate the amount of money the fully developed project will bring in (upon its completion) when it comes time to sell it or rent out its individual units. There is an organization called the Appraisal Foundation where much more information can be found on market valuation of commercial properties.

“Investment value refers to the value to a specific investor, based on that investor’s requirements, tax rate, and financing.” Or in other words the amount of money that a particular investor would pay for the property in question, upon its completion. Different people have different goals when it comes to investing their money. Therefore the investment value of a specific commercial construction property can vary from one investor to another.

Other types of factors that make up the total worth of commercial property include: insurable value, assessed value, liquidation value, and replacement value. There is also the cost approach; or a value that is determined upon what it would cost to replace that particular building in accordance with the value of the land. There is also a sale comparison approach where a particular building is compared in value to other properties with like characteristics.There is the income approach where a perpetuity discount model type is used to determine the rate of return on a project. There is a problem with this specific type of approach in that long-term tenants might not be paying current rates; therefore the building’s value goes down. Inflation can also negatively impact this type of approach to figuring out the worth of a certain commercial property.

In calculating the total worth of a certain commercial property it is necessary to have a basic understanding of the above-mentioned valuation concepts and also of the different approaches. MUCH more information is available on each of these factors on the Internet. Just go online to your favorite search engine and type in the title of this article. Your search will produce oodles of pertinent information for you to study. If you are having difficulties understanding these different aspects of commercial real estate investing, it is recommended you consult one or more experts who can assist you. A listing of such experts can also be found on the Internet.