Typically, when looking at commercial real estate, there isn’t a “one size fits all” approach to valuing a client’s property for sale. At Colorado Real Estate Brokers, we usually look at several methods to help determine the value and by doing so, give our clients a more well rounded approach on how to best be successful when bringing their property to market. 

 

Disclaimer: We are not licensed appraisers but we’re good at math and market analysis ;).

 

Method Number 1: Income Capitalization Approach

 

If you’re looking to sell an income-generating asset, we may lean heavily on this approach to value your property. If not known, we’ll work with you to calculate the Net Operating Income (“NOI”) and divide it by the Capitalization Rate (“Cap Rate”). This is probably the most common method in valuing a property as it emphasizes the property’s potential to generate income.

 

Note that the Cap Rate is a percentage representing the expected return on investment and it’s NOT a fixed number. Typically the Cap Rate moves based on where current interest rates are, the financial capacity of the tenant and the risk that the tenant will be able to keep paying the rent.  

 

There’s quite a bit more to this approach but this should give a very high level of understanding.

 

Method Number 2: Sales Comparison Approach

 

This is pretty straightforward. We look at other similar properties (comparables) within the same geographic area and we can get a sense of where your property could best be priced. Many things that we’ll take into consideration are size (square feet), use/type, condition and location. This is typically the better approach if the most likely buyer is an owner/user.

 

Method Number 3: Cost Approach Approach

 

Basically, we look at how much it would generally cost to build a similar property. Note that it’s not just the building cost and the cost of the land but also the time it would take to go through the permitting and possibly zoning process, the cost of your capital (if it were to be tied up in a development process) etc. 

 

It’s important to note that not all methods are used for every property. If you’re selling an income generating asset, like a strip mall where numerous tenants are paying rent, you may lean heavily on the income approach. However, if you’re selling a property that is ideal for an owner/user, the sales comparison approach and cost approach may be the preferred methods.

 

If the property could be used for an owner/user or leased out to a tenant, we would typically use all 3 methods.

 

Again, this is a very high level approach and we do realize that every property is unique in its own right and we definitely take that into account.