Buying, selling, or leasing a commercial property hinges on receiving a commercial real estate property valuation report. A commercial property valuation calculates the market value of a commercial property like an office building, industrial space, or apartment complex and is more subjective than a residential property valuation.
Commercial property appraisals depend more on uncontrollable elements like the current rental rate for spaces, available comparables, and overall maintenance costs.
The valuation report breaks down factors like the age and location of the building and the potential for income to give you a reasonable estimate of what the property is worth. This is vital when selling or investing because knowing the property’s value helps you make an informed decision about how much to offer or accept to get the best deal.
If you’re preparing to buy, sell, or lease a commercial property, it’s helpful to understand different approaches to valuation and how to get an accurate assessment from an experienced commercial real estate agent in Los Angeles.
Types of Property Valuations
You can use several approaches to help you value commercial property. Each method uses different factors and provides a unique perspective on the property’s worth:
Sales Comparison Approach
The sale comparison approach, sometimes called the market approach, compares the property to similar properties recently sold in the same area. The sale price of each similar property is looked at and changed based on the following factors, which are then used to estimate the market value of your property:
- Location. Your commercial real estate agent will look at your property’s neighborhood. They may consider its proximity to amenities like freeway access or railroad tracks (this is more for industrial buildings). Or if the property is situated on a main street with heavy traffic, is it on or near a main road or intersection? Lastly, our agent will also consider zoning, population, and demographic numbers in the area.
- Recently sold properties. Your realtor will review commercial property values and recent sales of listings in the area to calculate a baseline for comparing your property.
- Property features. As part of the sales comparison approach, your realtor will compare the commercial property prices of buildings with similar features like square footage, parking, land, and bathrooms.
- Condition and age. Your real estate agent will compare similar-aged properties in similar conditions to help them determine your property’s value.
- Price per square foot. The sales comparison method requires the realtor to determine the average price per square foot for your property for valuation. They will divide the sale price of your property by the average cost per square foot of similar properties to give you an estimated worth.
The sales comparison method is the most commonly used commercial and residential real estate valuation approach. It’s most useful for properties with sufficient comparable sales in the area, for example, an apartment complex. However, if you are buying or selling a unique commercial property, your realtor may use another method for determining the property’s value.
Gross Rent Multiplier Approach
The Gross Rent Multiplier (GRM) determines a commercial property’s value by dividing its price by its gross income. Overpriced properties tend to have higher GRMs, while underpriced properties tend to have lower GRMs. If a commercial building costs $700,000 and generates $95,000 in rent, the GRM would be 7.37 or $700,000/$95,000.
This approach helps you evaluate a commercial real estate market for investment opportunities by looking for properties with a low price compared to their potential rental income. The GRM can also be used to evaluate multi-family or apartment complexes by using GRMs from similar properties within the same market area.
For example, you compare a potential commercial real estate investment with a GRM of 7 to other properties with a GRM of 9 and 10. You might consider investing in the property with a GRM of 7 since it would take less time to recoup the initial investment and help you earn rental income faster.
Income Capitalization Approach
This valuation method is based on the income you can derive from a property. Analyzing similar local properties and projecting a decrease in maintenance costs can give you a reasonable estimate of that income.
For example, you purchase a $1 million building and estimate a 6% yield based on your research into the local market area. The property can generate an annual income of $60,000, but you can increase your revenue by determining inefficiencies such as passing costs to tenants like utilities including water usage or electricity.
How Is a Commercial Real Estate Property Valuation Report Done?
Commercial property valuation is done using different methods and tools. Typically, you will work with your commercial property realtor, who has specialized knowledge and tools to give you an accurate valuation report.
In general, valuing a property involves the following steps:
Assessing the Property
Assessing the property refers to identifying and evaluating all aspects of the investment that affect a potential return. This includes physical characteristics and profitability elements, such as square footage, location, property taxes, and recent upgrades or land improvements. Using similar properties with the same features, your realtor will estimate the value each factor adds to the property.
Analyzing the Market
As part of the valuation process, your realtor will analyze the market to understand current local real estate sales trends. They may look at supply and demand, occupancy and vacancy rates, and new property tax or assessment regulations to help them appropriately value your commercial property.
As an experienced commercial real estate broker in the Los Angeles area, Alex Matevosian possesses specialized insights into the regional markets that can significantly impact the valuation of your commercial property.
With a deep understanding of the sub-markets for commercial real estate and an extensive network of local building owners, Alex has access to multiple listings for similar properties, providing him with accurate data to determine the most precise valuation for your property. With Alex’s expertise, you can be confident that you are receiving the most informed analysis of your property’s value.
Calculating the Value
The final step in commercial property valuation is calculating the value of the property to be purchased. Your real estate broker will use a valuation method and their local commercial real estate experience to determine your property’s market value. They may perform a valuation using specialized software that calculates the value based on specialized input from the local market and property assessment.
FAQs About Commercial Real Estate Property Valuation Report
Should I Get an Appraisal or a Commercial Valuation Proposal? What is the Difference?
An appraisal is a valuation performed by an assessor from the Los Angeles County Assessor’s Office for tax purposes. Their valuation determines property taxes that need to be paid at closing by the buyer or seller.
A commercial valuation proposal is performed by a real estate broker to assess the market value of a property. Buyers use this assessment to understand how much to offer for a commercial property, while sellers use it to determine a fair listing price for their investment.
Typically, you get an appraisal when you’ve entered into a sales contract on a commercial property. Alternatively, you may get a commercial valuation proposal as a buyer or seller at the beginning of a commercial real estate transaction.
What Factors Are Considered in a Commercial Property Valuation?
Different commercial property valuation approaches consider different factors to arrive at an estimated property value. For example, the sales comparison approach looks at the property’s location, price of recently sold properties, price per square foot, and the property’s age and condition.
Alternatively, an approach like the gross rent multiplier method looks at the property’s price divided by its gross income.
How Long Does a Commercial Property Valuation Take?
Commercial property valuation in Los Angeles can happen in around three to four weeks but may take longer based on the property. The timeline depends on the property size, valuation method, and assessment tools your real estate agent uses.
How Do I Ensure That I Get an Accurate Valuation of a Commercial Property?
Work with a real estate agent specializing in commercial properties to get an accurate commercial property valuation. An experienced commercial property realtor is familiar with the local market and knows which valuation method best fits your property. They will also use specialized tools that give you a thorough, timely property valuation.
Get a Reliable, Free Commercial Property Valuation Report
If you want to buy or sell commercial property in Los Angeles, an accurate valuation report is essential to the proper pricing for the transaction. Alex Matevosian is an experienced Los Angeles commercial real estate who can provide a free commercial property valuation report for your investment or sales deal.
Alex specializes in industrial, office, retail, land, and multi-family apartment complexes. He uses state-of-the-art commercial real estate software and industry knowledge to accurately evaluate your property.
Whether you want a commercial space with high ceilings, a building with heavy power for machinery, or parking space for your fleet, our team can help you find the right investment. Take the first step and reach out to our team to get started with a detailed property valuation report for the property you’re looking into.
MIG Commercial Real Estate Services Inc. and Alex Matevosian do not provide legal, tax or investment advice. Any published articles, blog posts, resources or other related material located on this website are for information purposes only. Please seek the advice of an attorney, tax professional, and/or financial advisor for legal, tax or financial advice.