• A commercial real estate appraisal is developed using the same approaches to value as an appraiser would in a residential appraisal, the sales comparison approach, income approach and cost approach.
• Sales Comparison Approach- A set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, then applying appropriate units of comparison and making adjustments to the sale prices of comparables based on the elements of comparison.
• Cost Approach-The process of estimating the value of a property by adding the appraiser’s estimate of the reproduction or replacement cost of a property’s improvements, less depreciation to the estimated land value.
• Income Approach the income approach is a process to estimate an income producing property by converting the anticipated cash flow and reversion into property value. This can be accomplished in two ways. One years income expectancy can be capitalized at a market derived capitalization rate or a capitalization rate that reflects a specific income pattern, return on investment, and change in the value of the investment. Alternatively, the annual cash flow for the holding period and the reversion can be discounted at a specified yield rate.

The majority single family homes in New Jersey are owner occupied, however there are ones which are non owner occupied and are rented. But when the market area does not consist of many single family dwelling which are rented the appraisal in based primarily off of the sales comparison approach.

The majority of commercial properties in New Jersey are rented. Although some property owners do conduct their own business out of a building they own, it is much more common that an owner of a commercial property rents to tenants.

Therefore one of the most important aspects of a commercial appraisal is the income approach and all data collected and analyzed to develop this approach. The income approach is developed using comparable rentals as the sale comparison approach is developed using comparable sales. What a properties market rent is will greatly influence what its value is. When collecting market data an appraiser will select a capitalization rate which is derived from the market. Basically the capitalization rate is a rate of return which investors in the area are seeing as a return on similar commercial real estate investments. When a reconstructed operating statement is developed by an appraiser this capitalization rate is applied to arrive at a value.

The sales comparison approach however is not taken lightly. This approach is just as important as it is analyzing what comparables are selling for, and even more specific what they are selling for on a per square foot basis.

Although rarely an appraiser will come out with identical values for the sales and income approaches they are generally within a close range. Both approaches also serve as checks for one another as a typical investor would buy a property for a certain price with the anticipation of receiving a certain rate of return on his or hers investment.

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