How Are Commercial Real Estate Properties Valued?

IL real estate lawyer, Illinois real estate attorneyThe decision to buy or sell a commercial property is likely one of the most consequential financial decisions you will ever make. In order to get the best deal possible, proper valuation of the property is essential. An accurate appraisal of a property’s value is also used by lenders when determining how much debt the lender is willing to provide. There are several different approaches used to value commercial real estate properties.

Valuation Methods for Commercial Real Estate

Many people assume that the term “value” is synonymous with “price” or “cost.” Price and cost will certainly influence a property’s value, but they are not interchangeable terms. The value of a commercial property is typically determined by an appraiser. The three main methods for valuing a commercial property include the income approach, replacement cost approach, and market value approach. The valuation approach an appraiser will use depends on several factors including the type of property and how the property will be utilized.

  • Income Approach: An income approach or income capitalization approach is the most popular way to value commercial properties that produce income such as retail stores, office buildings, and apartment complexes. The appraiser will first estimate the property’s potential gross income and then deduct operating expenses to determine the property’s net operating income. Next, the capitalization rate or “cap rate” is used to estimate the price that the average investor would pay for the income produced by the property. The cap rate is then applied to the net operating income to determine the value of the property.
  • Replacement Cost Approach: The cost approach is much more involved than the income approach. This valuation approach considers the value of the land on which the property exists and then adds the estimated cost of constructing an exact copy of the property. Put another way, the cost approach calculates a property’s value by determining how much it would cost to completely rebuild the property and then adding this cost to the current value of the land. This approach is often used to value properties that do not generate income such as churches, schools, and hospitals.
  • Market Value Approach: The market value approach or sales comparison approach is often used to value residential properties but it may also apply to commercial properties. The value of the commercial property is estimated by comparing the property to similar properties that have recently been sold or are currently for sale. If there are no similar properties in the market area, this approach may not be effective.

Contact a DuPage County Real Estate Lawyer

Proper valuation is crucial when buying or selling commercial real estate property. At Stock, Carlson & Duff LLC, we work with a trusted group of appraisers to ensure our clients receive accurate valuations. Call our office at 630-665-2500 for a confidential consultation with a skilled Wheaton real estate attorney.


Should You Partner with Your Children to Invest in Real Estate?

DuPage County real estate lawyersFamily businesses can be a way for parents and children to bond, while also offering children a chance at a future they might not have otherwise had. Real estate investment is a different breed of family business, though. There are pitfalls that can leave you holding the debt and all that comes with it. This risk increases even further if you happen to have an adult child who is not quite ready to take on the responsibility. Does this mean you should not invest with your children? Not necessarily. The following can help you determine which decision may be best for your situation.

Taking an Honest Look at Your Child's Maturity Level

During the recession, a lot of real estate investors went under. Others flourished. What made the difference? It was often the ability to make sound, strong, and wise investment decisions. So, when wondering if you should partner with your children to invest in real estate, the first question you should ask is whether it is a sound and smart decision. You know your children best, so only you can truly answer this, but some things to look out for might include:

  • An unwillingness to help themselves (not working extra hours or finishing college courses, even though you are paying for them, etc.);
  • A refusal to take responsibility for basic daily living tasks (cleaning, cooking, laundry, etc.);
  • Poor use of time or other resources;
  • Any form of criminal activity;
  • Rebellious behavior or a general lack of respect for authority;
  • Addiction or gambling problems; and
  • A general lack of self-motivation.

Real Estate Investment with Adult Children Can be Rewarding

When children are responsible, ready to take on the extra task, and are willing to put for the extra effort to make it work, investing in real estate with your children can be a positive experience. It can provide them with a general sense of responsibility, can help alleviate some of the pressure off you (especially when it comes to completing physically arduous tasks), and can leave your child with a wonderful business long after you are gone. In some cases, it may even set your child up for the kind of employment independence and freedom that many people desperately crave.

How to Get Started

It is important to keep in mind that no parent should enter real estate investing with their child blindly. This is especially true for those that do not have a lot of hands-on investing experience. Instead, contact Stock, Carlson & Duff LLC for guidance and assistance. Our dedicated and experienced DuPage County real estate attorneys can provide you with sound counsel. In every situation, we will protect your interests. To learn more about how we can help, call 630-665-2500 and schedule your consultation with us today.