Valuing Properties: Commercial Private Loans
When lenders such as HML Investments considers financing a commercial property with commercial private loans, they need to be able to put a value on it. This valuation is usually done by a professional appraiser. They have the responsibility of estimating or giving an opinion of a value on commercial properties. It makes sense for you to understand how appraisers value commercial real estate so you can apply their techniques to our methods of estimating value. There are three approaches appraisers take to valuing property, comparable sales, income, and cost to replace the property.
- Comparable sales: In this approach, you look at the prioces of recent properties that have been sold in order to produce an average price for comparison. In commercial properties, instead of just looking at the overall selling price, the sales price per foot is also taken into account.
- Income: Commercial properties are chiefly valued by the amount of income they produce. Appraisers will look at net operating income when accurate financial information is available on the property. By calculating the capitalization rate for the property, it can be compared to the average for surrounding properties.
- Cost to replace the property: This approach to figuring out what a property is worth is called the cost approach. The theory behind this approach is that the price of the property is as much as it would cost to build a new one today plus purchasing the land. This is best done when the property is new or recently built. Thus, property value is equal to the land value + building cost – depreciation.
Before lending, private lenders like HML Investments use these property values to measure it against loan amounts. This is where much of the emphasis is put during the application process. Because private lenders are lending their own capital, it is important to have an accurate valuation of the property because the loan is secured by it.
Contact the specialists at HML Investments for further information about commercial private loans.