Hmmm, as a follow-up entry to my last entry about valuing commercial real estate, perhaps a good topic would be about some common misconceptions about the value of our property.

Municipal Assessment

Commonly clients mistakenly believe that the municipality's assessment of their property is an accurate reflection of it's value. In theory it is, but in practice it usually is not. Yes most municipalities including the City of Edmonton use Market Value assessments which means they value it at market value, but this system is flawed. There are simply too many properties and too many transactions for them to regularly review their information for accuracy. There are also other complicating factors such as a property not selling for some time resulting in no information for that property, improperly recorded sales values (this happens a lot - a client of mine bought a property a couple years back and received a rebate from the seller for repairs so that the recorded value was inaccurate...it's a long story), various reasons for sales, motivations, etc., etc.

Appraisals

I remember some years back reading through an appraisal manual and there were 17 different types of value listed in the manual - 17! Only one of those types of value was market value, the rest were other types of value. For example, mortgage value. If you hire an appraiser to value your property for the purpose of remortgaging, it will likely bring a lower number than market value.

Speaking of market value, probably the best definition of market value I have seen goes something like this; "The most probable price a property will bring when exposed to the market for a sufficient period of time, assuming an informed buyer and an informed seller, both parties acting reasonably". Now at great risk to my personal safety, I have to say many buyers and sellers are not as informed as they feel, nor do they act as reasonably as they believe. This is human nature and I do the same when I am buying or selling property on my own behalf (more on that in a minute) but I can't remember the last seller to say, "Oh Gerald, you valued my property too high" and I can't recall the last buyer to say "Oh now that's a good price" (that's not quite true, one buyer last week admitted a property in foreclosure was a good price, but the property didn't work for him - darn it).

And...speaking of foreclosure properties, rarely is a foreclosure property a steal of a deal, no matter what you are told. Banks are under legal obligation to get reasonable value for properties in foreclosure. Sometimes foreclosure properties are well priced because the amount of work involved in bringing them back into workable shape is substantial. When you factor in the work involved, you got what you paid for. BUT if you're willing and able to do the work, go for it - but I digress.

The Property Down the Road

This is the granddaddy of them all. Being human, I admit to doing this myself with my own properties, it seems to be unavoidable, but it is just as invalid when I do it. Of course, we all compare our properties to other properties for sale or recently sold in the area. This has two problems attached to it, the first being rose coloured glasses. It is pretty much impossible for us to emotionally detach ourselves from our properties. We take pride in them, maintain them, and we had our reasons for buying them. This invariably results in us overvaluing our properties.

The second problem with this is that many properties for sale are overpriced and do not sell. We compare our properties to them when they are for sale but we forget to lower our expectations when the property eventually does not sell.

Websites

The latest development in real estate on the internet is the arrival of web sites such as Zillow that tell you the value of your home. Again, they are subject to the same problems as municipalities but on a larger scale. It is very difficult to manage that much information. As a result accuracy suffers.  Additionally, interpreting that information can be daunting. Taking into account the aforementioned rose coloured glasses, well, you get the message.

Real Value

Now this is going to sound like what you'd expect to hear from a real estate agent, but the truth is that the best estimation of the market value of your commercial real estate is a current, detailed evaluation by a REALTOR® who specializes in your type of commercial real estate. The key words are current and detailed. The market changes (especially these days) regularly so current is critical. As well, commercial real estate is more complicated to value than residential and requires detailed evaluations. Get a REALTOR® who specializes in your type of property. I often get referrals from other agents or past clients for properties I do not specialize in. I will either refer them to another agent or work together with another agent if I feel it is important to remain a part of the process.