How do you validate the results of a commercial property valuation calculator with other methods or sources?

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If you are interested in investing in commercial real estate, you need to know how to estimate the value of a property. One of the tools you can use is a commercial property valuation calculator, which is an online tool that uses various inputs and formulas to calculate the potential income, expenses, and return of a property. However, you should not rely solely on a calculator, as it may not reflect the current market conditions, the specific features of the property, or the risks involved. In this article, we will show you how to validate the results of a commercial property valuation calculator with other methods or sources, so you can make a more informed decision.

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J. Neil Hamilton

"...for peace of mind in your transaction...!"
Ali Fakhri FRICS

Senior Real Estate Investment and Asset Management Professional
Dave Melanson

Senior Review Appraiser at HUD

1 Compare with similar properties

One of the easiest ways to validate the results of a calculator is to compare them with the prices and rents of similar properties in the same area. You can use online databases, such as LoopNet or CoStar, to find comparable properties and see how they are valued and marketed. You can also talk to local brokers, appraisers, or investors who have access to more detailed information and insights. By comparing the calculator's output with the real-world data, you can see if the calculator is accurate or if it needs to be adjusted.

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J. Neil Hamilton

"...for peace of mind in your transaction...!"
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Absolutely…one of the best and most accurate ways to find out what a particular property in a particular area is worth is to find and evaluate as many of the recent sales in the area as you can…and flesh out the ones that are as close in most aspects as the one you are evaluating…

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Ali Fakhri FRICS

Senior Real Estate Investment and Asset Management Professional
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Remember the valuation is as good as the inputs, carrying out a market research is vital, sourcing comparable rents and sale yields is only part of the information that form the basis of the assessment of value

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2 Use multiple valuation methods

Another way to validate the results of a calculator is to use multiple valuation methods and see if they agree or differ. There are three main methods to value a commercial property: the income approach, the sales comparison approach, and the cost approach. The income approach uses the net operating income (NOI) and the capitalization rate (cap rate) to estimate the value of a property based on its income potential. The sales comparison approach uses the sales prices of similar properties to estimate the value of a property based on its market demand. The cost approach uses the land value and the replacement cost to estimate the value of a property based on its physical condition. You can use different calculators or formulas to apply these methods and compare the results.

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Dave Melanson

Senior Review Appraiser at HUD
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The older the building, the less useful the Cost Approach becomes. After 8-12 years (an arguable range) the effect of depreciation is so large, and its estimation so imprecise, that the Cost Approach is less meaningful.

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3 Conduct a sensitivity analysis

A third way to validate the results of a calculator is to conduct a sensitivity analysis, which is a technique that tests how the value of a property changes when one or more variables are changed. For example, you can change the occupancy rate, the rent growth rate, the expense ratio, or the cap rate and see how they affect the NOI and the value of the property. This can help you understand the risks and opportunities of the property and how it responds to different scenarios. You can use a spreadsheet or a calculator that allows you to change the inputs and see the outputs.

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4 Verify the assumptions and data

A fourth way to validate the results of a calculator is to verify the assumptions and data that are used in the calculation. You should check if the calculator uses realistic and updated assumptions and data, such as the market rent, the vacancy rate, the operating expenses, the cap rate, or the discount rate. You should also check if the calculator accounts for factors such as depreciation, taxes, financing, or appreciation. You can verify the assumptions and data by doing your own research, consulting with experts, or reviewing official documents, such as leases, financial statements, or appraisals.

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5 Visit the property

A fifth way to validate the results of a calculator is to visit the property and inspect it yourself. You should look at the location, the condition, the amenities, the layout, and the appeal of the property and see if they match the calculator's inputs and outputs. You should also talk to the tenants, the managers, the neighbors, or the sellers and ask them about their experience, satisfaction, or expectations. By visiting the property, you can get a better sense of its value and potential.

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Ali Fakhri FRICS

Senior Real Estate Investment and Asset Management Professional
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This is the number one rule, how can one value without seeing the asset, without a physical inspection the valuation is less reliable.

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How do you validate the results of a commercial property valuation calculator with other methods or sources?

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5

1 Compare with similar properties

2 Use multiple valuation methods

3 Conduct a sensitivity analysis

4 Verify the assumptions and data

5 Visit the property

Commercial Real Estate

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How do you validate the results of a commercial property valuation calculator with other methods or sources?

1

2

3

4

5

1 Compare with similar properties

2 Use multiple valuation methods

3 Conduct a sensitivity analysis

4 Verify the assumptions and data

5 Visit the property

Commercial Real Estate

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