When making the leap from residential to commercial real estate, one thing that becomes clear is that assigning a price to commercial property uses a very different process than is used in residential. While reading up on appraisal techniques, I had the thought that the difference between commercial and residential appraisal can be well described as similar to the difference between a snapshot and a movie.
Putting a dollar value onto a residential property generally places a lot of emphasis on comparitive valuation. Appraisals or pricing talks referencing “comps” are very common in residential because location, size and amenities can be somewhat easy to compare.
Commercial is more complex in part because it deals in cash flows. One of the reasons you can compare residential properties more easily is because the sale of that property is like a single, well-understood cash flow from the buyer to the seller. And that single flow – the purchase – can be likened to a snapshot of that property’s history.
But in the commercial property world, the flow of cash into and out of a building is usually a monthly event at least. Rent is one such example, but maintenance and other flows exist in a series of payments or debits.
This string of events can be thought of as frames in a movie, telling the story of value of the property with more detail, more variables, and less capacity for easy comparison among properties. Another way of imagining the difference is to see residential property as stationary pricing target and commercial property as a moving target. It’s harder to hit a moving target.
Formal Approaches To Commercial Appraisal Include Business Valuation
When the broker opportunity touches a small business, business valuation techniques can loom large in commercial property appraisals. The techniques vary as much as the spectrum of different enterprises does. To access an excellent library of titles on the topic of business valuation, REALTORS® can access the NAR Field Guide To Business Value, after the link. It’s packed with books, audio books, videos, reports and research that will deliver perspectives on commercial appraisal.
(Note that the inclusion of links on an NAR field guide does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this field guide complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.)