A commercial property valuation can assist a seller and buyer in determining a fair sale price. It is a great idea to reach out to a professional valuation company in Adelaide if you want to know how much your property is worth. While the final decision of a sale price is up to you, a valuation report can be advantageous.
One of the benefits is that you'll get a good starting point to begin negotiations for a fair selling price. This will prevent you from selling your property at a too high or too low price. You'll also be informed of the reasons for your property's worth, based on its location, structural integrity, profitability, etc.
Here are a few more reasons why:
- A qualified property and business valuer will handle your case.
- Your valuer will treat your case professionally.
- They'll calculate the actual market value of your property.
- You will receive credible documents stating the current market value of your assets.
What is fair market value?
“Fair value” and “fair market value” are often used interchangeably. They have opposite meanings, although they look similar. The two terms can therefore not be used in place of each other.
Fair market value is the final price that a buyer and seller of property agree on. Both parties must also be aware of important information regarding the property in question. There should also be no outside influence in the negotiation of the sale. The decision to sell or invest in the property should be out of the seller's or buyer’s own free will.
On the other hand, fair value is the actual cost that you can sell an asset or transfer a liability for. It is calculated without any influence from the market or its conditions.
Now that we know what a fair market value is, let’s unpack how it is determined.
How is fair market value determined?
There are three main approaches that valuers take in order to determine the current market value of all kinds of real estate, including commercial property. You'll be able to work out a price that is fair for you and the buyer after knowing the market value of your property.
The three main approaches that valuers use to calculate actual market values are as follows:
- The Cost Approach
- The Income Approach
- The Market Approach
How to develop business valuation reporting
The accuracy of any valuation is owed to the various techniques used by qualified CPVs. Through a combination of three primary methods and particular knowledge of numerous industries, valuers can determine market value based on the current or retrospective value.
Most final reports will include the likes of:
- an exhaustive strength and risk analysis detailing the business’ longevity and more
- an explanation of the methods used and their suitability to the organisation
- a statement of fair market value
- an appendix detailing the resources and formulas used.
The Cost Approach
The cost approach focuses on calculating how much your business’s assets are worth. How much it would cost the investor to rebuild or construct a similar commercial property will also be calculated using this approach. The outcome of the calculation will then give you an estimate of how much the business or property being assessed is worth.
The Income Approach
The income approach considers a business’s capitalisation rate. How much your property has the potential to earn will be used to determine its current market value. Discounted cash flow and excess earnings will also be included where applicable.
The Market-Based Approach
This method is also known as a market analysis. It involves comparing your property and assets with similar ones to estimate their value. For this approach, the valuer will need access to a wealth of market data. For this approach to work, the size, location, age, and other characteristics of the comparable property must be as similar as possible.
Can anyone determine a fair market value?
Technically, no. Not just anyone can determine a fair market value. Someone without knowledge or experience in valuation cannot guide you towards determining a fair market value for your property.
The fair market value can only be determined after a professional valuer does an analysis of your property. Thereafter, the buyer and seller, who can be ordinary people, can agree on a fair market value.
There are two types of valuers that know how to value commercial real estate. As soon as your business or property has been assessed, you can start making arrangements and agreeing on a final sale price.
Qualified property and business valuers are registered members of organisations that set national and international standards for how valuation services should be carried out. Codes of conduct and ethics are also set out for its members to follow. This ensures that the valuer, certification institution, and client are protected and satisfied with the services rendered at all times.
Certified Practicing Valuers (CPVs) handle the valuation of real estate. They are registered with the Australian Property Institute (API).
Chartered Practicing Accountants (CPAs) assess the internal assets and financial standing of a business or the operations that occur on the premises of commercial real estate. They are registered members of the Institute of Public Accountants.
What is the fair market value of real estate based on?
Many things can affect how the fair market value of real estate is determined. The buyer's budget and the seller's ability to make a profit are two of them. These are some of the other factors it is based on:
- The buyer’s budget. If the buyer’s budget is lower than the current market value of the property, the seller may agree to negotiate a new price that suits them both.
- The seller’s selling range. The seller can decide on how much they are willing to accept as payment if they know the true value of their property.
- The urgency of the sale. In the case of the seller being eager to sell their business because of circumstances that cannot be delayed, they may be willing to accept a payment lower than they had initially planned.
- How much a bank or money lender is willing to loan. When loan valuations come less and there is a shortfall in the cost, the seller may be lenient enough to lower their price so that the buyer still has an opportunity to bag the sale.
Why is fair market value less than actual market value?
Oftentimes, bank loan security valuations down-valuate property. This means that the buyer will get a lower loan amount than what they applied for. If this happens, the seller can agree to renegotiate to lower the price.
Summary:
A property valuation for your business has many purposes. One of them is reaching an agreement on a fair market value. There are three main approaches that valuers use to determine the market value of your property. From there, a fair market value can be agreed upon by the seller and buyer.
The buyer or investor will consider their budget or financing ability, and the property or business owner will set a reasonable price. This is based on how much they are keen to sell their property for. Many other factors also affect a property's fair market value.
Although there are free valuations that you can complete yourself online, it would be best to consult an expert. While the valuation process is not child’s play, because a valuer has background knowledge and experience in the field, it will be a rather straightforward process for them to carry out. A certified valuer will assess your property and draw up an accurate valuation report.
Do you need more information on who determines fair market value? Get in touch with us today for more information on any business or property valuation matters.