How To Price Real Estate At It's Fair Market Value!
The ability to determine a fair market value for any real estate property is crucial for sellers and buyers.
Whether as a real estate investor looking to make a purchase, a seller attempting to sell property, or as a realtor seeking to suggest a fair market value to a seller in hopes of listing the property, arriving at fair market value is an important aspect that must not be ignored.
After all, who wants to buy real estate priced too high, or sell it priced too low?
Fair enough. But how do we prevent this from happening? How do we determine a fair value for real estate that is inline with the local market to avoid pricing it too high and never sells or too low that it's merely given away?
The most common approach is to create a Comparable Market Analysis (or CMA).
In this article, we’ll look at the comparable market analysis. We'll explore what it is, how its used, explain how to modify it when trying to determine the fair market value for commercial real estate, and show you a sample.
The CMA method is rather straightforward.
It provides a list of all similar real estate properties that recently sold in the market area so comparisons can be made and an average selling price established.
If several properties with similar location, condition and size recently sold, for example, you would list those properties in a report with all the particulars so an average selling price can be computed and a fair market value for that type of real estate determined.
This is generally easy with residential real estate because the data required for comparisons between houses similar in location, condition and size can typically be drawn. Arriving at a fair market value for commercial real estate, on the other hand, presents some issues that prevent the CMA from revealing as much as they do for the sales of houses.
Dealing With Commercial Property
The problem with commercial real estate is that it usually suffers from a lack of comparables to make a CMA meaningful. Namely, you wouldn’t expect to find quantities of strip malls or office complexes that recently sold exactly matching in square footage or location.
Therefore, to make your research a bit more productive for these types of commercial properties you will need to tailor your comparative market analysis to include some additional factors.
1) Price per square foot. Your CMA can be structured to include the selling prices per square foot thus giving you the option to compare the sale of any strip mall or other commercial real estate property regardless of size.
For example, if a strip mall with square footage of 80,000 sold for $1.4 million the price per square foot would result in $17.50. Therefore you can arrive at an estimated value for your similar commercial property by multiplying your property’s square footage by that amount.
2) Gross rent multiplier. You can examine each property's annual gross rent and have your CMA highlight what is called the gross rent multiplier (or GRM). The computation is actually easy enough to compute in your head simply by dividing the property's selling price by its annual gross rent.
For example, if an office complex with gross rents of $80,000 sold for $480,000 then the gross rent multiplier would result in 6.0. Okay, now you would multiply your similar commercial property’s gross rental income by 6.0 to arrive at an estimated fair market value.
In both cases you might have to obtain sale prices and property dimensions of sold commercial properties from the tax assessor, perhaps on the internet, from a local appraiser, or from a commercial real estate broker. But this is not overly difficult and usually highly constructive.
Okay, but don't get me wrong, because a CMA (regardless how thorough) is seldom going to tell you enough about any property for you to make a real estate investment decision.
A comparable market analysis nonetheless is a useful way for you get a feel for your market regarding fair market value and sales history for similar types of real estate. Why not think about creating a CMA the next time you do a real estate analysis. You will certainly find it worth your effort.
About the Author
James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com
ProAPOD also provides iCalculator - an online real estate calculator that enables you to learn dozens of real estate definitions and formulas as you calculate. You save 64%. Learn more at real estate calculator
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