Opinions of Value: How Does that Work?
One question we get a lot is: how does your team come up with the listing price for commercial properties? While we wish it were as easy as consulting our Magic 8 ball, valuing a commercial property is a much more complicated process.
Without a thorough system for valuing each property, a misvalued property can sit on the market for months or even years. When clients come to us to determine the value of their building, we produce a BOV. That’s a Broker Opinion of Value.
People often ask: how does an opinion of value work?
To develop our opinion of value, we use several techniques. We’ll go over a few today, but this is a very general overview. Every property valuation is developed with a tailored approach. No two property valuations are exactly alike. We arrive at a value that is based on local data, national best practices, and regional market factors.
First up, we aggregate comparable sales or leases, or both. And because the Sterling CRE team maintains the largest private, proprietary library of local commercial sales data, we have the most accurate sales and leasing information.
We also use our local knowledge of city and county codes, land use planning, zoning, tax information, and building features to provide additional context for our valuation range. But, comps aren’t the only way to understand the most accurate valuation.
When performing a valuation, we also use the property’s financials to hone in on the best listing price. It’s also important to use the cap rate to calibrate the sale price. Cap Rate is used to calculate a property’s ROI. The formula to get a Cap Rate is Net Operating Income divided by the price of the property. In today’s commercial market, most cap rates we see fall in the 5% to 8% range.
A highest and best use analysis also allows the property owner to see their maximum return. We also identify the use that best suits the communities needs. That means: is a property currently being used to its best potential – or would building something new be better for the community, and better for the property owner’s value?
So, while it might be easier to consult our Magic 8 ball, the team at Sterling takes a different approach to property valuations. These techniques and others are deployed to arrive at the most accurate valuation – one intended to move properties without sacrificing margins. Thanks for watching How Does That Work? You can get more information on commercial real estate sales and development by following us on Facebook and LinkedIn.
Contact Matt Mellott for a Broker Opinion of Value on your property.