Houston Commercial real estate appraisal is a combination of art and science. Commercial real estate appraisers use judgment honed through years of experience in combination with large quantities of empirical data to make informed judgments regarding the market value of real estate. Knowledgeable appraisers gather and analyze data prior to making informed decisions about real estate value.

Houston commercial real estate appraisals gather and analyze data such as commercial rates, construction and absorbtion. Appreciation rates vary greatly from high growth rates to lower growth rates. Having relevant comparable sales data is essential (see www.oconnorcomps.com.)

The appraisal profession has developed a series of well-established analytical techniques; the cost approach, income approach and sales comparison approach. These approches are universal. They apply to properties in San Antonio, Austin, Houston, Dallas, London, Hong Kong and Tokyo. The most appropriate approaches depend upon the characteristics of the subject property. The appraiser and the client should discuss the scope of work including which approaches to value will be most appropriate in valuing the subject property.

Cost Approach

The cost approach is considered most applicable for commercial real estate appraisals for relatively new properties and special-use properties. Commercial real estate appraisers are less likely to use the cost approach for older properties due to the difficulty of precisely calculating the amount of depreciation. Depreciation includes physical depreciation, functional obsolescence and economic obsolescence; it is anything that decreases the value of the improvements below replacement cost.

Examples of function depreciation include a home with no air conditioning and a 10-story Houston office building with no elevators. Examples of external obsolescence include low rental and occupancy rates due to over building Houston apartments and being adjacent to a property with noxious odors

Income Approach

The income approach is considered most applicable for investment or income properties. Real estate investors and lenders often place primary emphasis on the income approach. Actual income is a more direct basis of comparison than cost or comparable sales for income properties. Appraisers gather data regarding the actual income and expenses for the subject property, rental comparables, expense comparables, industry expense data, market occupancy, and rental market trends.

The commercial real estate appraiser then estimates gross potential income, other income, effective gross income, operating expenses, and net operating income. Depreciation, amortization and interest are not considered expenses in calculating net operating income. Operating expenses are deducted from effective gross income. Net operating income is converted into an indication of market value using a conversion factor termed the capitalization rate, using the following formula:

Market value = net operating income/capitalization rate. This process is termed direct capitalization.

The income approach can also be calculated using a discounted cash flow analysis. Revenue and expenses are estimated for a period of years and the resulting annual cash flows and gross proceeds from a projected sale of the property are discounted to a present value using a discount rate.

Sales Comparison Approach

Commercial real estate appraisers also utilize the sales comparison approach to estimate market value. The sales comparison approach is often considered most comparable for owner-occupied properties.Appraisers gather data from a variety of sources. These include buyers and sellers of property, real estate brokers, online databases, other appraisers and lenders. Accurate comparable sales data is integral to a credible sales comparison approach. After obtaining data regarding similar properties that recently sold, the appraiser makes adjustments to generate an indication of market value for the subject property.

After considering each of the three approaches to appraisal and preparing an analysis for the approaches which are considered relevant, the appraiser reconciles the indications of value to a final value conclusion. The quality and quantity of data for each of the approaches is considered when reconciling to a final value conclusion.

O'Connor & Associates is the largest independent appraisal firm in the southwestern United States and has over 40 full-time staff members engaged full-time in valuation and market study assignments. Their expertise includes valuing commercial real estate, single-family, business personal property, business enterprise value, purchase price allocation for businesses, valuation for property tax assignments, partial interest valuation, estate tax valuation, expert witness testimony and valuation for condemnation. They have performed over 20,000 commercial real estate appraisals since 1988.

To obtain a quote or further information for a commercial real estate appraisal, contact either George Thomas or Craig Young at 713-686-9955 or fill out our online form.