How to Make a Commercial Real Estate Market Analysis
When buying or selling commercial property, it's imperative to know its current market value. Professional appraisers analyze and compare a target property with other commercial listings that recently sold. Commercial real estate brokers do the same thing but in less detail. You can follow a similar method of determining the approximate market value of a commercial property if you're planning to purchase or sell in the near future.
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Instructions
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Use a commercial market analysis as a starting point in pricing your property or making an offer on a property. Although many real estate transactions involve lots of haggling over a price, knowing in advance what the property is likely to sell for, allows you to obtain financing from a lender and helps you justify your offer or price during negotiations.
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Select similar properties. Choose at least two properties that sold recently. Since the market can fluctuate within a period of months, try to find sales that occurred within in the past 6 months and in close proximity to your target property. However, commercial sales may be few so you may have to broaden your selection to include sales farther away. A real estate agent can give you a list of recent commercial sales.
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List your target property and at least two other comparable properties. Write down the selling price for each of the comparable properties and then add or subtract from each as you address specific value. For instance, if the target property has 1000 sq. ft and Comp A has only 700 sq. ft. add a dollar value to Comp A for the additional 300 sq. ft. If Comp 1's selling price was $50,000, add what you feel is a reasonable sq. ft. value, perhaps an additional $10,000, bringing Comp A's value to $60,000. Repeat this process for other value aspects, such as the quality of interior finish, the structure, location and included amenities. Add and subtract from the comparable properties, not from the target property.
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Change the value of the comparable properties to develop an estimated selling price for the target property. Once you understand the math, the rest is easy. Under the Target property, select an estimated sales price, just as a starting point. As you go through the value aspects above, keep in mind that you will add or take away based upon the condition of the target property. For example, suppose the target property has brand new carpet but Comp B sold with very poor carpeting. Decide the value of the target property's carpeting and add that amount to Comp B's column. This illustrates what Comp B may have sold for, if its carpeting was brand new.
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Examine the final tallies for both comps. These numbers indicate what these properties may have sold for, if they were very close in condition, size or location to your target property. Sellers may choose a listing price somewhere between these two numbers and buyers may make an offer based upon these figures. Keep in mind, however, that sellers may set any price they choose and buyers may offer any amount they desire. The analysis only indicates what the property is likely to sell for eventually.
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Call contractors for estimates on repairs and get prices from suppliers for things like new windows, doors, bathroom fixtures and any other items that the target property may need to make it salable. Your final market analysis figures are only as good as your ability to determine the value of specific property aspects.
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Tips & Warnings
There are lots of good commercial real estate sources on the market that can assist you in completing a market analysis. One of the best is "Commercial Real Estate Analysis and Investments." See "Resources" below for this item.
