Average Cost Of Commercial Appraisal
Average Cost Of Commercial Appraisal - This month we'll look at the direct comparison method of business valuation and make some adjustments to the valuation. In most cases, direct comparison is the simplest method of evaluation. It is very useful as an error check against other valuation methods and can serve as a primary method of value determination if not available. It is the most straight-forward method, easily applicable when there are enough similar properties to compare, and is the most reliable and preferred method for valuing non-income producing properties.
By the end of this article, you'll be able to combine all three methods to create a general checklist to evaluate your potential purchase.
Calculating the value of land and buildings is a simple way to determine the underlying value. You'll find that this is great for residential properties, but may be different for commercial properties. I'll explain why in a minute, but let's start with a simple apartment example:
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Land values are available from several sources and you should use the most reliable or relevant source. For example, you can use the most recent amount shown on the Land Tax Assessment, or if you directly compare sales evidence, it may be more appropriate and more appropriate to reflect the true market value. You average some recent sales to determine the $/m2 price and then apply it to your area. You may want to adjust this amount by a small percentage to show whether your location is doing slightly better or worse than comparable sales, but if sales are roughly the same, it's best to use them without adjustments.
Improvements should be valued at a depreciated amount to reflect age and remaining useful life. People often overvalue a building based on its current replacement cost and residual value, not when it was built 20 years ago. If you're planning on bulldozing your house, it's worthless to you. It can also represent a discount on the land price against demolition and removal costs (especially if they involve asbestos or other potential costs).
In business examples, we often look at land cost, replacement cost, and present value. The issue may not reflect the current price we are willing to pay based on current cash flows. For example:
It gets a little complicated. Commercial real estate is valued based on cash flow, not replacement cost. This is because we are buying future income streams. See Valuation of Dummies: Discounted Cash Flows, Part 2, for further explanation.
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Sometimes you find that it goes the other way, especially with older buildings. For example, you paid $12.86 million for the above investment and then find out that the cost of switching insurers is $20 million and your premiums are much higher than expected. Because the building is dilapidated. If it were new, you would find that the price is much higher, reflecting the longer expected cash flow period and lower capital expenditure in the first 10 years. You may have noticed that newly constructed (Class A) buildings tend to have higher yields (ie, lower capitalization rates) than older Class B or Class C buildings.
Direct comparison is the simplest method, but is often used to check for errors with other methods (rather than as a primary business valuation tool) or where the property has no income (ie is vacant). give us a good advantage. Pricing Considerations.
If you look at recent business valuation reports, you'll see that the last part is a direct comparison. The bank will always want to confirm that the capitalization level and DCF approach are consistent with recent sales to ensure that the purchase price is not above market.
Market data is often readily available and provides a useful starting point. Don't be afraid to ask the seller for recent comparative sales (comps). He or she will have this information readily available, which will be very helpful for you in making an evaluation proposal.
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Let's say you want to buy a small office in North Sydney. The office is $1000m2 but is currently vacant so I don't know how to value it using the capitalization or DCF method.
From the above, we can assume that the total face rent is approximately $785/m2. The bonus is running at 20% and the current yield is 5.13%. However, not all office spaces are equal, so we can try to find additional explanations in their reports. We rate the space we're looking at as a B-grade office. Below is an excerpt from the same report.
In the period to September 2018, total rents for one level in North Sydney increased by 6.7 per cent to an average of $920/m2. Premiums fell to 20 percent from 21 percent a year ago, and effective rental growth was 8.2 percent. Over the past 12 months, total Grade B rents have increased by 5.4 per cent to an average of $780/sq m, while premiums have fallen by 2 per cent to 18 per cent over the same period. Rent growth is strong going forward
Limited speculative supply and tight tenant inquiries are still expected to be unable to be completed.
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We think the market rent for our 1000m2 office would be $750,000. If we use 6% (again, better to be conservative) to capitalize this lease, the value is $12,500,000.
We took a recent sales survey and found that Class B offices are selling for between $11,000 and $13,000 per square meter. In the example above, our office is valued at $12,500/m2, and we believe it is affordable considering location, presentation, CAPEX requirements, etc. You'll notice that we've only directly compared other sales to make sure our estimates are accurate and acceptable. We don't know who to rent this space to or what incentives we are currently offering. Do Last Month's Valuation for Dummies: DCF lets you factor in premiums and vacancies to see if that changes your purchase price.
From a buyer's point of view, I find it very useful to have direct comparisons to ensure that rents are not inflated. This is most dangerous if the seller gets creative with the lease structure. Here are some examples:
The owner is leasing the building back for his own business. Companies often sell properties when owning real estate is not part of their core business and they don't want to have assets or liabilities on their balance sheets, but if rents are above market, buyer beware. Let's say that the above $3000 building should be leased for $300/m2 net, but he is leasing it back at $400/m2. From Part 1 of our Valuation Dummies, you should be able to quickly identify two different values with the same 7% capitalization rate. For example:
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You can see why some landlords might prefer to match this contribution rather than a rent-free period if they're cash-strapped. There are many potential benefits:
The biggest risk with this contribution plan is that the tenant has a bad business model and breaks even within a year or two and you spend a lot of money on their custom setup. So as long as you have good tenants and general setups that other people can use at no extra cost, the plan should be good, even profitable.
So how do we deal with over-rented (or under-rented) properties? i.e. above or below market rent (from our direct comparison test)? In this discussion you can hear the following words:
Very simply, the forward yield tells you the current yield (usually taking into account vacancies) relative to the purchase price. This is called the current or original yield, and it tells you what the actual rental value is versus the purchase price.
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The full lease yield tells you what the estimated net income would be against the purchase price if all the vacancies were leased (make sure you're using market rent, not excess rent, in this calculation).
Similarly, the market yield tells us what the property would be worth if it were at a market rent instead of a pass-through rent. It is important to note that current and past rents may be above or below market rent. If there is a vacancy, this usually uses the agent's expected market rent, which you can compare with rents passed on by other tenants, but be careful not to let agents overstate the market rent to inflate prices and exaggerate potential growth.
Reactive rents and returns refer to what the new income/return will be after rents return to market rents. Note that it may be more or less. A building below market rent usually occurs when the market has grown significantly and the tenant has benefited for a long time.
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