Pricing is often a touchy subject for sellers of commercial real estate. Often a seller will want to price their property based on what they owe, what they paid, or what they'd like to get. Unfortunately, these three numbers don't usually have much to do with what the market will bear. Pricing a property in line with the market is the best way to attract several potential buyers. More buyers means more chances to get the best possible price for a property. So how do we figure out what the market price should be?
There are 3 typical ways to value a property (please keep in mind I am not an appraiser). These are the cost, the sales comparison, and the income capitalization approaches to value. I'll describe each briefly:
Cost: This approach to valuing a property is based on estimating the cost to rebuild the property today, including the cost of the land, but subtracting depreciation. This approach is usually best on special use, owner occupied, properties with no close comparables.
Sales Comparison: This approach looks at sales of comparable properties on a per unit or per square foot basis, and applies similar pricing to the subject property. The sales comparison approach is typically used for single family properties of 1 to 4 units, but is not often used with commercial properties.
Income Capitalization:This approach uses the income from the property to determine a value. There are several variations of income capitalization, these include discounting cash flows (DCF), gross rent multipliers, and direct capitalization. Direct capitalization is the most common of these three income methods. It involves applying a market Cap Rate to the income stream generated from the property. This is the preferred method for income generating commercial real estate.
The price that you bring your commercial property to market should be based on one of these three methods, not on what you owe, what you paid, or what you'd like to get. Otherwise your property may sit on the market for too long and cost you more in the long run. If you need help pricing your commercial real estate in Reading, PA, give me a call today.