If you’re planning to buy your first commercial property, you may be wondering where sellers are getting their figures from. The truth is there are several different ways that commercial properties can be evaluated and priced. Today, we’ll walk you through some of the most common methods for evaluating commercial real estate in Chicago.
The Cost Approach
Sometimes referred to as the “replacement cost approach,” this method estimates the amount of money it would take to replace the entire property. This includes the cost of the land that the building sits on, the construction materials, labor costs, and any other costs which may be incurred by creating a replica of the building. The depreciated value of the existing building will then be deducted from the cost. This is a favored method when it is difficult to find a comparable property on the market.
The Income Approach
Also known as the “income capitalization approach,” this appraisal technique takes into consideration the amount of potential income a buyer could earn by renting the property. There are two sub-types: the direct capitalization method, and the yield capitalization method. Through the direct capitalization method, the property’s evaluation is estimated using a single year’s income forecast and calculating it against the market multiplier. The yield capitalization method takes the net operating income estimates into account.
The Comparison Approach
The sales comparison approach evaluates a property based on the sell price of similar properties in the area. Appraisers will consider properties with similar features and locations, including proximity to transportation, highways, and other businesses. The age and condition of the building is also taken into consideration. This method can be beneficial to help ensure that a property enters the market at a fair and realistic sell price, potentially facilitating greater interest and a faster sale.
In some cases, none of these more standard approaches are most strategic for a given property. Commercial buildings can also be priced per square footage or “by door.” A cost assessed by door may is most appropriate for multi-unit buildings. Assessing a property by door means that an average cost of the building’s units will be devised and then multiplied by the number of units within the building.
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