Are you currently looking for your next commercial real estate venture and a certain property has caught your eye? Or are you perhaps thinking of selling one of your assets?
Before proceeding with any real property transactions, it’s important to find first its estimated value through an appraisal.
This article will provide a clear understanding of the whole commercial property valuation process and the different barriers that often cause inaccuracies in the data for commercial real estate valuations.
What is real estate valuation?
Real estate valuation, or real estate appraisal to others, is how the value of any real estate is estimated using certain appraisal methods. Property valuations are crucial for various real estate-related businesses, particularly in determining the purchase price of a certain real estate asset.
A real estate asset’s value is technically defined as the current worth of future benefits resulting from your ownership of said property.
Real estate value estimates consider social and economic trends because the benefits associated with them can only be achieved years after.
Why does real estate valuation matter?
Identifying the value of any commercial property helps not only effectively setting the asking or purchase price of said asset, but it’s also a crucial procedure for the following:
Real estate financing or loan
- Sales listing for properties to sell
- Investment analysis (Is the commercial property worth investing in or not?)
- Determining the value of property insurance coverage
- Identifying property tax
These are some processes that require accurate data from commercial real estate valuations.
Things to Remember in Commercial Real Estate Valuation
Aside from knowing what commercial real estate valuation is and how it affects investments for property owners, other things need to be taken note of.
- The value of the asset does not always correspond to cost or price. For clarity, cost refers to expenses for the property, while the price is the amount that the buyer pays.
- While cost and price dictate a property’s value, these factors can influence it to a certain extent.
- The appraisal value is also not the market value. This is often confused by many. The valuation process or the appraisal is an estimated value of a certain asset as of a certain date. Certain entities or individuals use valuation reports to decide on real estate transactions. So the goal of an appraisal is mainly to determine the property’s market value.
What are the top data barriers that affect accurate valuations?
1. Validating accuracy and organization of commercial real estate data
The quality of data gathered will directly influence decision-making, which will impact your business results— this is the universally-established fact.
So, this begs how confident you are in the data gathered for commercial real estate valuations? If you’re not certain, it’s best to take a step back and reevaluate what should be done.
You can start by considering the following factors:
The commercial real estate industry has always been unpredictable. It became even more volatile with the recent happenings around the world. So, you can’t expect that the numbers from two years ago are still the same. Even the data from the previous quarter could have changed drastically.
Other firms have stepped up their game with how frequently they have their property valuations. And, understandably, you don’t want to fall behind, but there should be a balance between how frequent valuations should be and the current resources you have.
Not only will false data harm your investment opportunities this can also be a dealbreaker when negotiating with a client. The reports should reflect the information researched regardless of stats.
Standardized format for data
The variety is good. But not so much when dealing with the details of data. It’s difficult to reconcile certain information when using different measure metrics. When one document reflects square feet and the other uses square meters, chances are, you will end up with tons of confusing numbers and one massive headache.
Data accuracy and transparency
The commercial real estate industry views property taxes as a crucial factor in regulating the industry. Local authorities pay strict attention to taxes levied, particularly for retail assets. As an owner, managing such obligations help avoid costly issues and helps prevent surprise costs.
Consequently, familiarizing yourself with the most prevalent property tax misconceptions will help make improved decisions moving forward.
2. Understanding how your commercial real estate assets measure up to the general market
Having correct data makes managing commercial assets easier. And to make good investment decisions for any of your assets, it’s not enough to only look into your property’s valuation reports. Comparing it with the current market, see how your property stands, and discerning what could make it work (or not) will provide an entirely new perspective.
There are several ways real property data comparisons can help you.
- Precise evaluation of a property you’re eyeing to acquire. Comparing data helps determine if it fits your portfolio
- Helps plan for annual business operations by accurately creating key metrics according to your assets
- Compared data is useful in determining when a specific asset is at its peak for selling
3. Identifying useful information from the gathered data to guide investment decisions
Solutions experts consider this the final blockade to have accurate commercial asset valuations. They gather accurate and up-to-date information on your properties when scaling the market isn’t enough.
The next step is to analyze the data and create actionable steps based on what you’ve understood from it.
Now, this could be easier said than done. For data to be useful, the right resources must also be used. Data analysis also requires the right technology and the right people, more often than not, apart from knowledge and expertise.
There are various appraisal methods used, but there are three commonly used valuation approaches that you need to be aware of.
This method is effective when the property to be valued has undergone improvements like the addition or renovation of buildings. Estimation for the building(s) and the land are done separately; then, it is added together to determine the overall value of the improved property.
The cost approach works well on assets that do not generate income, like schools, hospitals, churches, or government buildings.
Sales comparison approach
The property’s estimated value is determined by comparing it to recently sold properties that bear similar characteristics. Aside from the similarity in features, comparables should also pass certain requirements to provide an accurate comparison.
And since no two properties are the same, adjustments to the comparables’ prices will be made by considering the distinct features and other factors.
Income capitalization approach
This particular method heavily relies on the correlation between the required rate of return and the actual net income of the asset.
Ass what it’s commonly called, the income approach is often used to estimate income-producing real estate. It’s a straightforward approach, especially when a property is expected or built to generate income and when its future expenses can easily be predicted.
Commercial real estate valuations are crucial to almost all property-related transactions out there. Learning the estimate of a specific asset to determine its potential market value gives investors insight into what needs to be done moving forward. But appraisal reports are only as good as their data. That’s why it’s even more imperative to study how data-gathering can be improved.
Managing commercial assets is difficult enough as it is. So it’s understandable if revamping the valuation process to acquire accurate data will not be easy. In this case, employing the help of seasoned solution experts could help straighten out a few things and make life easier.