Commercial Real Estate - What's the Value and What's the Price?

If you are a Real Estate Agent, there is a big difference between putting a price on a property versus formally valuing it. These two processes can give you entirely different figures for the same property at the same time.
In simple terms the pricing of a property reflects the current market trends and the potential of making a sale. This may only have minor relevance to the actual value of the land and improvements. You would normally price a property to take the property to market for a sale. The price is adjusted given the positive and negative aspects of the property.
Valuing a property is however a complex process of calculating the replacement value of the improvements, adjusting that figure relative to age of the asset, and then adding that figure to the value of the land in today's market. The overall figure is then adjusted given the desirability of the property, and the income factors coming from and generated by the property. A formal property valuation will cost money and will take days if not weeks to prepare (depending on property type).
So what figure is correct? They both are and it just depends what you want to do with the property. If it is a formal and accurate valuation that you need then a well-qualified and certified property valuer is essential to the task (not a general real estate agent). If you want to sell a property, then a good Real Estate Agent is the requirement. In either case, the experience of the selected person to do the task is essential.
In some circumstances the client may need to get a formal valuation before they see a real estate agent to market the property for sale or lease. When working with complex and large properties, this is good practice in preparation for the sale. The client thereby has a good understanding of the market before they move to the point of sale.
There are many reasons to value a property formally. Some of them are:
  1. To obtain new mortgage finance from a bank or financier
  2. To extend existing finance availability
  3. To assess the potential of selling the property today
  4. To consider an expansion of the lettable area of the property
  5. To redevelop or change the property and its use
  6. To assess the income potential for future tenant mix changes
  7. To prepare for a challenge to the ratings notices from the local council
  8. To transact a change of the ownership structure
  9. To prepare for the annual property business plan
  10. To arbitrate on a rental dispute with tenants in the property
These are the main reasons for a property valuation. Importantly the property valuer that is to do the valuation must have sound and significant knowledge of the type of property and the local property market. Interestingly many a property valuer will get much of their market intelligence from real estate agents.
So when someone wants a property priced or valued it is important to know why they want it done and then the correct decision can be made as to who should do the work.
John Highman is an expert real estate speaker and coach that helps Real Estate Agents globally to improve their property business, market share, listings, and commissions. John is a successful real estate agent himself and has been so for over 30+ years.