For better or worse what you paid for your property doesn’t really matter. One of the common statements made by property owners when we give them an evaluation of their property is that they paid “X” amount for the property so they would at lest like to get that price. Imagine if you called your investment broker and told him to sell that stock of Sears you bought in 2007 for $100/share. He then looks up the value and says it is trading for $0.30/share. Could you tell him you would like to at least get what you paid for it back? Real estate values are based upon three approaches: Sales Comparison Approach, Income Approach, and Cost Approach.
Sales Comparison Approach
This approach is based on final sale prices of comparable properties in similar areas with comparable features which have recently sold. This method is one of the most accurate and usable forms of valuation when the type of property is traded frequently because you would use market sales of a large number of comparable properties. This approach is commonly used for valuation of single family, multifamily, vacant commercial, and land properties. The condition, location, and size of the properties are the primary features that are adjusted to match the subject property. Each adjustment will add or subtract values from the comparable property sales price to reflect the difference.
This is used for properties held for investment, such as retail centers, multi-tenant office buildings, apartment complexes, etc. This valuation includes estimating how much the property is worth based on the net operating income of the property divided by current market capitalization rate (“Cap Rate”) of similar properties. Every investment property is unique, so it is important to use the appropriate cap rate or gross rent multiplier to determine the value. All too often inexperienced resimercial agents use an arbitrary cap rate of 10% to come up with a value. This is usually done because it is easy to calculate, and doesn’t involve any research.
The final method to valuation is probably the least commonly used. The cost approach is mostly used for properties that are unique and are intended for a specific use. Because these property types are not traded often there is minimal market data available to use. Churches, schools, specialized manufacturing facilities, hospitals, sports and entertainment venues, and government buildings are some examples of properties that are best evaluated using the cost approach. Using this method, you determine the cost to build these properties new and the cost to rebuild the property should it be destroyed and replaced. Someone assessing it would evaluate these costs, the cost of the land, and then deduct the depreciation to reach the value of the property.
While what you paid can be used in some cases it really has little to no bearing on the true value of the real estate. To find out how much your property is worth, call Latitude Commercial at (219) 864-0200 today!