The completion of most real estate transactions in Florida hinges on the valuation of the building or property in question. Unlike residential real estate, commercial real estate valuation is much more subjective. Uncontrollable elements like current rental rates for commercial spaces, maintenance costs, few properties for comparison, and how much buyers are willing to pay influence valuation.
Six common valuation methods
Brokers use six common methods to value commercial real estate. These are the cost approach, sales comparison approach, income capitalization approach, value per gross rent multiplier, value per door, and cost per rentable square foot. You’ll find the methods sued in the following ways:
- Cost approach – Considers the cost to rebuild a structure when there are few comparable properties on the market.
- Sales comparison approach – Relies heavily on recent sales data for comparable properties to determine fair market value.
- Income capitalization approach – Determined by the amount of income an investor can expect after buying the property.
- Value per gross rent multipliers – Measures a property’s value by dividing its price by its gross income.
- Value per door – Based on the number of units used primarily for apartment buildings.
- Cost per rentable square foot – Extrapolates value by comparing the cost of rentable square feet to the average lease cost.
The complexities of commercial real estate
All valuation of commercial property is unscientific and subjective, which can lead to disputes. Savvy real estate investors always want to get the best deal.
The various valuation methods can cause significant differences in the price you want to pay versus the price the seller deems fair. Mediation and arbitration are two methods you can use to come to a fair price that both sides will accept.