What Exactly Are Commercial Investment Appraisers?
Commercial investment appraisers are essentially both scientists and artists. Knowledgeable appraisers will put together and perform an analysis of data before making an informed decision regarding the value of the real estate. Good commercial real estate appraisers follow some well developed and well established techniques, income approach, the cost approach, and the sales comparison approach. The features of the property in question are what decide which approach is to be taken.
The cost approach is considered to be the best suited for appraisals of commercial real estate, if the properties are relatively new or are special uses properties. This approach is not likely to be used if the property is old because it is difficult to precisely calculate the depreciation in value.
The income approach is supposed to be the most appropriate for properties which are bought as an investment or which are expected to generate an income. The data concerning the actual income and expense for the property like expense comparables, rental comparables, industry expense data, rental trends and market occupancy are gathered. The real estate appraiser will then estimate the gross potential income, effective gross income, other income, net operating income and operating expenses. The net operating income is used to calculate the market value with the use of a factor of conversion known as capitalization rate. The below mentioned formula is used to calculate the same:
Market value equals net operating income divided by capitalization rate.
This method is known as direct capitalization and the income approach uses an analysis of the discounted cash flow to calculate the value of the property. The expenses and revenue are estimated over a few years and the resultant cash flow and gross proceeds resulting from selling of the property are calculated to a present value using a discount rate.
Some commercial investment appraisers also use the sales comparison approach to calculate the market value. This approach is often said to be most suitable for properties which are occupied by owners. Once the data concerning similar properties that are recently sold is collected by the commercial real estate appraisers, they make adjustments to calculate the market value for the subject property.
Once all these three approaches are applied to the appraisal and an analysis is prepared for the approach which is relevant and the appraiser will reconcile the indications of the value to final value estimation. The quantity and quality of the data for every one of the approaches is taken into consideration when reconciling to final value estimation.