Pricing Commercial Real Estate
Pricing Commercial Real Estate
“Property is only what someone else is willing to pay for it regardless of professional estimates.”
- It’s the Seller who must determine the listing price for the property, not the real estate agent or the appraiser.
- The role of an appraiser is not to determine value; rather he develops a supportable and objective report about the value. The owner and real estate agent are seeking maximum value while looking ahead to the future and the appraiser is seeking to justify the appraisal by looking at the past. The appraiser does not establish the property’s worth; instead he verifies what the market indicates.
An appraisal is an estimate or opinion of value based on supportable evidence and approved methods.
Competitive Market Analysis (CMA) is a comparison of the prices of property recently sold, properties currently on the market and properties that did not sell. CMA is not an appraisal.
Value…to have monetary worth based on desirability
Market Value versus Market Price
Market Value is the most probable price property would bring in an arm’s length transaction under normal conditions on the open market. Market Value is an opinion of value based on analysis of data.
Market Price is what a property actually sells for—its sales price. Theoretically, the market value and the market price should be the same but generally are not.
Market Value versus Cost
A common misconception is that cost of the property or an improvement to a property represents value. Sometimes when the improvement is new the cost and market value may be the same, but as time goes along the two get further apart.
Basic Economic Principals that Affect the Value of Real Estate
* Anticipation. Value can increase or decrease by the expectation that certain events will occur, i.e. rumor that adjacent property will be converted to commercial use in near future.
* Change. No physical or economic condition remains constant.
* Competition. The interaction of supply and demand.
* Conformity. Value is created when a property is in harmony with its surroundings.
* Contribution. The value of any part of a property is measured by its effect on the value of the whole. The improvement may not add to the value of the property equal to the cost.
* Highest and Best Use. The most profitable single use to which a property may be put or the use that is the most likely to be in demand in the near future.
Increasing and Diminishing Returns
Law of Increasing Returns – money spent on improvements produces an increase in income of value. Law of Diminishing Returns – the point where additional improvements do not increase income of value.
Regression and Progression
Regression – the worth of a better-quality property is adversely affected by the presence of a lesser-quality property.
Progression – the worth of a lesser-quality property is positively affected by the presence of better-quality property.
The maximum value of a property tends to be set by how much it would cost to purchase an equally desirable and valuable substitute property.
Supply and Demand
The value of property depends on the number of properties available in the marketplace. Other factors include the prices of other properties, the number of prospective purchasers and the price buyer will pay.
Appraisers Three Approaches to Arrive at ESTIMATED Value
Sales Comparison Approach – comparing the subject property to recently sold comparable properties. Because no two properties are exactly alike each comparable property must be analyzed for differences and adjusted for any dissimilarity.
•Conditions of Sale
• Physical Features and Amenities
The Cost Approach – consists of 5-steps
• Estimate land value as if it was vacant and available to be put to its Highest and Best Use.
• Estimate the current cost of constructing buildings and improvements.
• Reproduction Costs- current construction prices of exact duplicate.
Replacement Costs – cost to construct similar building.
• Estimate the amount of accrued depreciation from property’s physical deterioration, functional obsolesce and external depreciation.
• Deduct accrued depreciation from the construction cost.
• Add the estimated land value to the depreciated cost of the building and site improvements to arrive at the total property value.
Income Approach– based on the present value of the right to future income.
• Estimate annual potential income- current or projected (market rates) rental income.
• Deduct appropriate allowances for losses.
• Deduct annual operating expenses to arrive at NOI.
• CAP Rate – comparing the relationship of net operating income with sales prices of similar properties that have sold in current market. Income÷ Rate= Value
The appraiser weights the three methods, adds the amounts and divides by three to arrive at an estimated value.