Just like residential real estate, there needs to be an unbiased opinion of the value of commercial real estate properties, hence why commercial appraisals are done. According to the narrator in the video, a commercial appraisal is a land or property valuation method that helps assess the value of a commercial property. This task is undertaken by a 3rd party licensed professional known as a commercial appraiser.
Banks require commercial appraisals before issuing out loans to purchase commercial real estate.
Commercial appraisers conduct checks using three different methods, namely, the comparable approach, the income approach, and the cost approach.
The comparable approach involves the appraiser evaluating properties in an area similar to the property they’re appraising or that has sold within the last six months. They will compare the property being appraised with properties in the area to find its potential value.
The income approach involves evaluating the property’s net income; this means operating expenses are subtracted from gross rent. The net income is then divided using a cap rate, a metric used to determine a simplified return for a property.
The cost approach considers the cost of the land, construction, and labor to determine the value of a property; this is typically done on newer properties.