Whether you are looking to buy or sell a commercial real estate property in Phoenix, Mesa, Scottsdale, or throughout Arizona it’s important to be clear on its value (Or price as a Realtor that is what we work with).
What is a commercial property market Value? Market Value is the most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under duress.
There are four different formula approaches that are typically used to appraise/value a commercial property in the Phoenix-metro market and choosing the right formula for your particular property is essential to ensuring that it is priced correctly. I typically use the sales comparison and income approach formula. Both formulas will complement each other, and the numbers typically line up. Let’s look at these four formula approaches separately.
Sales Comparison Approach formula
The term sales comparison approach refers to a real estate appraisal method that compares one commercial property to comparable or other recently sold properties in the area with similar characteristics. Real estate agents and appraisers may use the sales comparison approach when evaluating commercial properties to sell. This method accounts for the effect that individual features have on the overall property value. In other words, the total value of a property is the sum of the values of all of its features. Every Realtor and Appraiser use this approach to establish fair market value.
Income Approach (cap rate) formula
The commercial income approach is another way to value a property while analyzing a deal. Because it’s based on the income a property generates, investors seeking to determine immediate cash flow can gain a deeper understanding of the value it can deliver within their portfolio immediately.
Current Value = Net Operating Income (NOI) / Cap Rate
For example, the current value of a rental property with an annual NOI of $700,000 and a cap rate of 8% would be $8.75 million ($700,000 / 8% = $8.75 million).
The cap rate is extrapolated from market sales of comparable properties in the same area. The cap rate can be adjusted to account for unique features of the property, such as high-quality tenants or a less attractive façade. The final cap rate should be within half a percentage point of the local average for comparable properties.
The Cost Approach Formula (land + building + improvements)
Although the details are more complicated, the basic formula for valuing a property using the cost approach is:
Property Value = Land Value + (Cost New – Accumulated Depreciation).
The cost approach is based on the economic belief that informed buyers will not pay any more for a product than they would for the cost of producing a similar product that has the same level of utility. The cost approach to valuation is easy to use when the property is new and represents the highest and best use of the property. In this case, cost new is known because the improvements were just built. In addition, there should be a negligible amount of accumulated depreciation. Since the cost approach does not rely on comparables, it is also useful when valuing a special use property or a property with unique components.
Cost per door formula
Quite common when determining price for multi-family, apartments, or commercial retail. A common method of referring to the number of doors in an apartment complex. One might say, “Asking price $1,000,000 or $125,000 per door for an 8 unit multi-family.”
Factors that influence Phoenix-metro commercial property values
So, what kinds of factors impact a property’s value/price? The key factors are
- The size of the commercial property.
- The condition of the commercial property: This is key because it’s how so many investors add value to a property. By renovating and improving a property, even if you’re not doing major structural remodeling, you can increase its value in a short amount of time.
- How the property is (or can be) used: For one thing, a commercial property will be valued differently from a residential property. What’s more, various usage restrictions may also impact the value. For example, if zoning restrictions mean it’s impossible to turn a commercial property into a luxury block of apartments, then that restriction may impact how much buyers are willing to pay.
- The property’s location:
- Supply of property: For the past year we have lacked commercial property for sale, today that number is slowly increasing.
- Demand for property: Industrial real estate has more demand than office space.
- Zoning and or possible zoning change: A zoning change can drastically increase a commercial property value/price.
- An unrealistic seller: Its your property, you can list at any price but don’t be surprised when/if it does not sell, very low showing activity, etc.
Which Formula is Right for Me?
Now that you have a much clearer picture of each of these fundamental valuation formulas, you may be wondering which method is right for your Phoenix-metro commercial real estate property. The short answer is that each of these formulas is valuable depending on your situation. For example, it’s going to be harder to determine cap rates and comparable selling prices for a property that is located further away from comparable properties; in which case, The Replacement Cost Approach may make the most sense. If you have access to the data needed to determine the cap rate, The Income Approach will be sufficient. If you have a property where vacancy rates fluctuate (such as a multifamily building), this may not work out so well; in which case, you might consider The Market Value Approach of using comparables.
I know appraiser is used quite a bit throughout this blog. I am not an appraiser; I am a Realtor. If you are looking for true market value, I advise you hire a commercial appraiser. Understand that only a commercial appraiser deals with commercial property values, commercial realtors deal with price.Juan Pesqueira, Realtor
A property’s price (how much the property costs to purchase) can be vastly different from its value (what the property is worth). For example, a property may actually be worth in the region of $300,000 but the seller may have an inflated idea of its value and insist on putting it on the market at $350,000 — or he may have been guided to set the price high by an especially greedy agent who wants a higher commission.
There is no right or wrong way and at the end of the day the commercial property value is determined by buyers and sellers.
How to Find your Commercial Property Value…
If you’re ready to sell or would like help determining your commercial real estate property price you can
- Free Property price analysis and sales consultation. Have a confidential meeting with me to find out what your property will sell for in today’s market and the process of selling a commercial property. However, understand that my opinion is just that and to find TRUE MARKET VALUE you should hire a commercial appraiser.
- You can reach Juan Pesqueira – Attorneys Realty at 480.458.8007 (This cell does not have a voice message so if I don’t pick up leave a detailed message), call my office 480.767.6900, or shoot me an email: Pesqueira2@cox.net.
How much is my commercial property worth?
Fill out the form below (or call or email). I will run numbers and do a full market analysis. We will be in touch with my analysis conclusion and or if I have any questions.