How to Determine the Fair Market Value of a Commercial Property

Embarking on the journey of purchasing or selling a commercial property can be a long and stressful one, but one that is ultimately rewarding. However, before you get to the end result, you have to make sure that you are doing your due diligence when it comes to purchasing or selling a commercial property. One of the things that you should pay close attention to is the market value of the property. Researching the fair market value of the commercial property that you are interested in will help you in knowing that you are getting the property for the right price and not overpaying for it.

The fair market value is the price that the commercial property would be bought or sold at in an open market. There are a few conditions that have to be taken into account before the fair market value is ultimately determined. The first is that both the prospective buyer and seller are knowledgeable about the commercial property. The second condition is that both parties are behaving in their own interests. The third condition is that both parties are not receiving any unreasonable pressure to complete the transaction. With these three conditions in mind, a fair market value can then be determined. There are a few different ways that fair market price can be determined and these are discussed below.

Cost Approach

The first way to determine the fair market value of a commercial property is by using the cost approach. The cost approach assesses the value of the property based on how much it would cost to build it from scratch. Other factors are also taken into account with this approach, such as the current cost of the land that the commercial property is sitting on, construction materials, and any other costs that would be associated with the rebuilding or repairing of the existing structure. The cost approach is generally used in situations where other value determining methods cannot be used, due to things such as the uniqueness of the building or if special improvements were made.

Sales Comparison Approach

The second way to determine the fair market value of a commercial property is through the sales comparison approach. This approach is also known as the market approach. The sales comparison approach relies heavily on the sales data that has been collected on other properties that are similar to the commercial property that is currently on the market.

An example of how this works would be if you are looking to purchase a space with 5 units available for renting out, you would look at what the same type of property down the street just sold for a few months ago. This will give you an idea about what to expect to pay for that particular commercial property.

Income Capitalization Approach

The third approach that you can use to determine the fair market value of a commercial property is by using the income capitalization approach. This approach is based on how much income you, as the investor, can expect to receive from the property. The income that you can expect to make can be partly determined by using the comparison method. You would look at how much income a similar  commercial property in the same area is bringing in. With the income capitalization approach, you will also want to take into account how much maintenance costs you can expect to pay on the property as well. The maintenance costs will decrease the amount of income you will ultimately receive from the commercial property.

These three approaches are the most common ways for fair market value to be determined. You can use only one approach, or use all three. Each will give you a significant amount of information about what you can expect to pay when purchasing a commercial property. They will also reveal how much you should list your property at if you are looking to sell it. The more knowledge you have about the fair market value, the more you can potentially make. The process of buying and selling could go a lot quicker if you have the fair market value knowledge because you will know what prices to negotiate at.

Commercial Property, Property Tips