Why Sales Comps are Vital to Commercial Real Estate Appraisals
Sales comparables (or “comps”) are vital for any given real estate transaction. Whether you are buying or selling a property, knowing the sales comps will help you get an idea of whether or not the property is a good investment. Due diligence and research are required for any profitable investment, especially when it comes to commercial real estate, because smart investing is not about luck, but rather a series of prudent decisions culminating in future success. To be sure you are making a sound investment, be sure to pay attention to commercial real estate comps.
There are four ways that commercial real estate is valued. These are sales comps, cap rates, replacement costs, and the gross rent multiplier. Only recently have lenders understood the true importance of considering sales comps when it comes to their investments.
What are Comparable Sales?
Similar to residential real estate, commercial real estate also uses sales comparisons to determine the value of a property. Sales comparables refer to properties that have similar characteristics to another property, and therefore a similar value. Appraisers will compare many different factors when determining the market value of a property. Ensuring that the data used is up-to-date and accurate is imperative when assembling these comps. Some of the sales comps considered in a commercial appraisal are:
Location
Square footage
Construction age
Size
Acreage
Type of construction
Property sales history
Recently sold properties
The sales comparison method is commonly used when the asset is largely vacant or completely vacant. This means that the income adds little value to the actual value of the property. Commercial appraisals include the tax records or CRS data. The sales comparison method uses the equation:
Price per square foot x square footage = property value
By extrapolating information through a comparative market analysis (CMA), investors are able to gain insight for strategic decision making. Finding commercial real estate comps can be more difficult than residential comps, but no less important, whether you’re a lender, buyer, seller, or appraiser. In order to find accurate comps for real estate, appraisers may have to look outside of the market area, which could be an issue when it comes to matching correct demographics or leasing trends. Despite this challenge, it is necessary to consider comps to provide an accurate depiction of the market value of a commercial property.
Why are Sales Comps Necessary?
Sales comps for commercial real estate are a necessity to ensure accuracy in the valuation. The purpose of analyzing comps is finding the true market value of an asset through historical data of properties with similar characteristics within a similar market. Each individual market provides its own unique characteristics, so comparing one property to another provides an extremely accurate representation of the true market value. Although real estate comps are merely estimates, a CMA can provide important information that is necessary for the appraisal process. Comps can reveal what buyers and sellers are willing to pay for a given property, and therefore how lenders should proceed. Choosing the wrong comps can negatively impact the confidence that all involved parties will have in the estimated value of a property.
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