Real estate appraisal is an important element of buying or selling a property. It is also used to make various financial decisions regarding investments, sales, taxation, and mortgages. 

When it comes to assessing the value of property, property appraisers use one of the techniques:

1. Sales Comparison Approach
2. Cost Approach
3. Income Approach

Each of these techniques has its special use, merits, and demerits. 

This blog will consider different strategies that have been adopted, new tendencies that have developed, and their relevance to Commercial Property Appraisal, which is popular in Toronto and throughout Canada. 

1. Sales Comparison Approach

The sales comparison approach is frequently used to estimate the value of dwellings and other business premises. The basis of the sales comparison approach is the sale of similar properties in the same locality.

Steps in the Sales Comparison Approach

• Identify Comparable Properties, and it is critical that the data on the sales be recent and find similarly comparable properties (CP) occurring in the same area and equally stratified with similar features and conditions.

• Adjust for Differences involves modifying the selling prices of the base referring CPs relative to their ability to serve as the subject property for sale.

• Analyze Market Trends using the current-day perspective on issues such as market demand and supply, an array of economic factors, or the particular country’s housing market being of interest.

• Derive Value Estimate is implemented using the mean of the comparables’ adjusted price.

Advantages and Limitations

• Advantages: 

•  You get an accurate representation of the market today
•  The straightforward formula adds up.
• Something that is not residential may or may not be able to get financing later toward the bottom of this section

•  Limitations: 

• It will not be the right choice for all Sundry or Specialty properties.

Latest Trends in Sales Comparison Approach

• Data Analytics.-Big data and analytics tools help to improve adjustments and generate market intelligence comparing properties.

• Automated Valuation Models (AVMs): An Automated valuation model is a mathematical equation with an algorithm using multiple data sets that can afford to value the property more quickly and efficiently than any traditional methods.

2. Cost Approach

The Cost Approach measures value based on the quantity of resources needed to replace or reproduce an asset, less deductions for physical deterioration. 

This approach is most suitable for new buildings and those with special uses where recent comparable sales data is limited.

Key Steps in the Cost Approach

Estimate Land Value: Find out the value of the land on which the property is developed, usually through the Sales Comparison approach. 

Reproduction Cost: Determine the cost of replacing or reproducing the building and making improvements to the building. 

Assess Depreciation: Physical depreciation relates to the wear out, or actual deterioration of the asset, and functional depreciation is based on the loss of an asset's capacity to perform the function for which it was acquired. On the other hand, external depreciation is used when comparing the earning power of assets in different industries. These measures should be used to help revise the replacement cost.

Sum Components: More the land’s worth plus the depreciated replacement cost will ascertain the total value of the property.

Advantages and Limitations

• Advantages:
•  It can also be used in new build projects and other exceptional homes.

•  It helps create a reliable actual presence of value for the business. 

• Limitations:
•  Such estimates are always arbitrary to a certain extent because the amounts at which depreciable assets are written off are purely uniform.

•  Lacks the capacity to highlight the contemporary situation in the property market, especially older buildings.

Latest Trends in Cost Approach

• Green Building Practices: Incorporating sustainability into construction means that the valuation will incorporate the costs and returns on aspects such as green products. 

• Technology Integration: Specific databases and software have helped refine and make construction cost estimations quicker.

3. Income Approach

The income approach is commonly employed to evaluate commercial properties. It appraises property using the income it produces. It appraises property based on the income from the property.

Key Steps in the Income Approach

Estimate Potential Gross Income: Estimate the total possible rental income the property could have without missing any empty units or collections. 

Deduct Vacancy and Collection Losses: Account for possible reductions in its revenues resulting from vacant units or unpaid rents. 

Calculate Net Operating Income (NOI): In the operating profit calculation, the effective gross income is said to be reduced or subtracted by the operating expenses. 

Apply Capitalization Rate: Spit the NOI by the capitalization rate – a rate of return that reflects the investor’s required return – to give the property value.

Advantages and Limitations

• Advantages:
• Represents the capacity for income generation of the property.

• Recommended for business and apartment use.

• Limitations:
• Depends on income and expenses data.

• Cares about alterations in the market and the shareholders’ expectations.

Conclusion

The way you value property can have an impact on the outcome. The Sales Comparison, Cost, and Income Approaches each have strenghts; they work best for certain properties and situations.  

Toronto's commercial real estate market has its own feel, movement, and needs. So, it's key to ensure appraisals fit the market and keep up with new trends and ideas.

The real estate market keeps changing and getting more modern. PV Realty Advisors stays one step ahead. They give you quick and smart commercial property appraisals in Toronto. 

When you want to buy or sell a property or space or put money into one, you can trust PV Realty Advisors to give you spot-on and helpful valuations.