As an investment advisor, I am often asked for my opinion on value by property owners or clients looking to purchase a commercial property. Some of these questions are: how do we decide on the value of the property? What makes a property more valuable than the other? What are the key factors we should pay attention to while we are assessing the value of a property? How can we increase the value of a property? Is having a good credit, corporate backed-up tenant good enough to increase the value of a property?
The answer to all of these questions is: first decide on the type of the property and what its highest and best use is. After deciding on the type of the property, there are three approaches you can follow: Replacement Cost Approach, Sales Comparison Approach, Income Capitalization Approach.
Replacement Cost Approach
The Replacement Cost Approach is often used when appropriate comparable properties are difficult to identify. The investment advisor determines the property’s value based on the land value plus the current replacement cost of improvements less depreciation. The cost approach is most accurate when applied to a relatively new structure with no functional deficiencies. Investment analysts usually use this method when appraising special–purpose buildings that do not produce income or when there are few comparable sales around the building being evaluated.
Sales Comparison Approach (Market Approach)
Sales Comparison Approach uses the data of comparable properties’ sales prices to estimate the value of the property. This method is commonly used for valuing residential real estate. To make the properties more comparable, prices are divided by the number of square feet, then the adjustments to each of