When you are purchasing real estate, you want to make sure you are paying a fair price. This is especially true in commercial transactions, which typically involve the exchange of significant amounts of money. If the purchase will be financed by a bank loan, proper valuation is not only important to protect your interests, but is a requirement for bank-financed transactions.
Appraisal – The Key to Determining Value
The value of commercial property is determined through a property appraisal conducted by a qualified appraiser. A qualified appraiser is a person who has either been certified by a professional appraisal organization, or has the required education and experience to conduct appraisals in his area of expertise. A real estate agent is not a qualified appraiser (unless he or she also has these certifications), so the sales price he or she sets is insufficient to support the valuation, and should not be relied upon.
There are three methods appraisers use to determine the value of real property. The method used depends in part on the type of property being valued and the proposed use.
- Income capitalization approach: Most commonly used for valuing income producing properties like rental properties (both residential and business) and shopping centers, the income capitalization approach places a value on the property based on its income-producing potential (the net operating income) and the investor’s expected rate of return. Under this approach, characteristics such as the property’s location and condition are not considered when determining value.
- Sales comparison/market approach: This approach is most commonly used when valuing single-family homes, and is the approach taken by real estate agents when setting the property’s sales price. It looks at the sale price of comparable properties (usually within the past year), which means properties that are not only similar in size and location, but were sold under similar market conditions. For example, the sales price of a property that sold during a depressed market would not be a good comparison for a property being sold during a housing boom, even if the properties were a match in all other areas.
- Cost approach: The cost approach method looks at the value of the property, including land and any improvements, less depreciation. Under this approach, the property’s value generally will not exceed the cost to build a similar, brand new property.
If the valuation is needed for litigation and the parties disagree on the appraiser’s methods or his final valuation, the court must decide the issue. In cases of disagreement, the other side will often get a second appraisal. It is then the attorney’s job to prove in court that the valuation assigned to property by his appraiser is the correct one.
Sugar Grove Real Estate AttorneysWhether you need a commercial real property valuation as part of a business transaction, divorce or probate, the dedicated Sugar Grove commercial real estate attorneys at Law Office of James F. White, P.C., have helped hundreds of clients throughout the Chicagoland area obtain a fair and appropriate valuation on their commercial real estate interests. With more than 40 years’ combined experience, our attorneys have a thorough understanding of each valuation method and, along with the appraiser, can help defend the property valuation in negotiations or litigation, if necessary. Contact our office today at (630) 466-1600, or complete our online form, to schedule a free initial consultation. Sources: http://www.investopedia.com/terms/q/qualified-appraiser.asp http://www.investopedia.com/terms/i/income-approach.asp http://www.investopedia.com/terms/c/cost-approach.asp#axzz1uqxIZ6me