Let’s look at two methods of calculating a possible sales price:
In both methods’ you look for the most recently sold properties that are as close as possible to the property that we want to sell.
Method 1 - Comparative Market Analysis (CMA) reports are based on comparable properties using sales price and the square footage of the building that have been sold giving you the sales average square foot. Then we multiply the sales average square foot by the square footage of the building in question.
Method 2 - The capitalization rate is the truest financial summary of an income property’s potential risk and/or appreciation. Many factors, such as interest rates, unemployment rates, and consumer confidence can be used for recommending more specific capitalization rates.
For the purposes of Illustration we will use only the information provided by the comparable properties and the Net Operating Income (NOI) of the property in question.
Using the properties in Method 1, we divide the Net Operating Income (NOI) or by the Sold Price.
Illustration
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The first step is to find 3 properties as similar and as close in distance that have sold/closed, to your building.
BSF = Building Square Foot
Cap Rate = Capitalization Rate
NOI = Net Operating Income
Status Address Sell Price BSF NOI Cap Rate
Closed – 6151 Linden Ave - $4,150,000 – 12,776 – $350,804 - 8.45%
Closed – 2475 Cedar Ave - $2,549,000 – 11,504 – $189,720 – 7.44%
Closed – 4300 E. Centralia - $2,150,000 – 8,278 – $ 62,900 - 2.92%
Illustration:
Method 1 - CMA
Add total sells price and building square footage then divide by number of buildings:
Sales price - 2,079,000 + 2,549,000 + 4,150,000 = 8,778,000 / 3 = 2,926,000
Building Square Footage - 12,776 + 11,504 + 8,278 = 32,558 / 3 = 10,852.66
Average Sales Square Foot – 2,926,000 / 10,852.66 = 269.61
Multiply the average sales price per square foot by your building square foot:
269.61 * 15,399 = 4,151,724.30
CMA Estimated Price = $4,151,724.30
Method 2 - Using the Capitalization Rate:
Add the capitalization rate for each building, the divide by the number of buildings:
8.45 + 7.44 + 2.92 = 18.81 / 3 = 6.27
Let’s assume your net operating income is $400,000.
Divide the net operating income (NOI) by the capitalization rate (Cap Rate) to get the current property value:
400,000 / .0627 = 6,379,585.33
Capitalization Rate Estimated Price = $6,379,585.33
The supplied index is a general guide for commercial properties used by some investment companies.
Current Cap Rate and Negative/Positive Spread Index
Current Recommended Capitalization Rates | Current Negative/Positive Spread | Recommendations |
7.5% - | Strong Positive Spread | Strong Buy |
7% - 7.5% | Medium Positive Spread | Buy |
6.5% - 7% | Minimal Positive Spread | Moderate Buy |
6% - 6.5% | Minimal Negative Spread | Moderate Sell |
5.5% - 6% | Medium Negative Spread | Sell |
5% - 5.5% | Strong Negative Spread | Strong Sell |
I am not a licensed Appraiser, so the contents of this report can only be used as a general guide to the formation of an assumption of value.