Determining Commercial Property Market Value Is Different Than Determining Market Value For A Residential Property

Category: Finance, Real Estate.

Here in the United States, "fair market value" on any item is determined by what a buyer is willing to pay a seller for the item.

While real estate also has a fair market value, it is a bit harder to determine because of all the factors which go into the valuation. Simply put, if I have a stick of gum, and I offer it to you for ten cents, and you want to purchase it for ten cents, then the fair market value of the stick of gum is ten cents. A property, unlike the simple stick of gum in the above example, has multiple aspects for a seller and buyer to put different valuations on. Determining commercial property market value is different than determining market value for a residential property. Introduce a lender into the picture, and then you have a third option on valuation to deal with as well. In a residential valuation you can simply look at other recent comparable sales in the area, of similar homes and lot sizes, and determine about what a property is worth at any given time. One major difference between residential and commercial properties is their location and their use.

The issue you will find with commercial property is that they tend to be one- of- a- kind properties, and you may not be able to find many local comparable sales in recent times. If you own a large lot inside of the city limits, with a huge warehouse store built on it, with a 10 year lease to a big box store, then you have a very valuable property. Location, also known as market area, is more important in commercial real estate because businesses need to be near to their workers and to their customers as well. If you have the same lot size, with the same store on it, but it is, same lease located 30 miles from the only local town where most people in the area live, then you have a lesser valued property. Another consideration when looking at market value of a commercial property is the availability of similar properties on the market. This gives you some leverage to point out differences and better negotiate the price you are willing to pay.

By looking at as many properties as possible, you can start to get an idea of what different properties are selling for in your local area. This will also give you some idea of how difficult it will be to find a tenant for your property. You will need the rental income to cover your investment funding as well as your day to day costs of owning the property. If you are tying to determine the market value of a piece of commercial real estate, one of the factors you should always consider is how well other properties in the area are renting and what they are renting for. If you purchase a property at an agreed upon price, will the rents support the costs? These are things you need to think about prior to purchase. What if your property sits vacant for a month or two?

When trying to determine commercial property market value there are many factors which come into play. By determining what you are willing to pay for a property, and having a professional commercial real estate market analysis completed for you, you can avoid many of the mistakes new commercial property investors make. The biggest being the market area, rental income potential, local property costs, and the property condition itself.

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