Valuing Commercial Real Estate

[Kyle Majors]

Hey BP,

I initially thought that to value commercial real estate you just use the income approach and apply a cap rate. I have read about other methods such as the cost approach and the sales approach. I am confused in what way I should value commercial properties. Any experienced investors that can give their thoughts? 

Thanks! 

[Henri Meli]

@Kyle  Base on what you say, should an empty building cost $0 ? 

The value is whatever the buyer is willing to pay/the bank willing to finance... technically !!! If someone is paying cash, they can pay whatever they believe it is worth. If the bank writes the loan, they determine which factors they would use to determine the value. The city that assesses the taxes also uses different formula to come up with a value.

When I bought my commercial office building, a bank contracted someone to assess the value of the property. In their report, they used 3 approaches to determine the value. Since the bank wrote the loan, they determined which formula to use to determine what they considered the value they were willing to write the loan for. 

As an investor, the income approach is what I would use to determine the value first. If a building is empty and I believe I can fill it quickly ... I wouldn't offer $0 to the seller !!! 

The question you need to ask yourself on every deal is: How much are you willing to pay?