What is contractors method of valuation of commercial property?

A contractors method of valuation for a commercial property can be very useful in cases where an unusual property comes up for sale or lease. This method is of immense use to contractors, investors and even real estate developers and is mostly used for rare properties or properties that hit the market only once in a while. These properties are usually meant for only the purpose that they are currently serving and no other type of business can shift into it.

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Since there are commercial properties that do not have alternative uses and are of very special type, the usual methods of property appraisal may not be even applicable to them. Some of the examples of such properties are club houses, oil refineries, town halls or public libraries. Such properties rarely come to the sale-purchase market and exchange hands. If the usual methods of appraisal will be applied for their valuation, there are good chances that the value thus arrived will be erroneous. Many real estate investors and even developers are not aware that there is something called the Contractors Method Of Valuation.

Formula for contractors method of valuation

The formula for determining the value of a special commercial property is – take the cost of the site of the property and add the cost of the constructing building similar building and minus depreciation and obsolescence at a certain percentage.

Thus, the formula can be summed up as:

Cost OF Site + Present Cost Of Construction – Depreciation

The cost of the building would be mentioned on a per sq metre basis and the depreciation rate has to be one that is reasonable and is prevalent at the time of valuation. The land where the present commercial structure stands may require remediation or some site preparation and there will be costs to do that too. Those costs will also be taken into account for the calculation of value through this method.

Limitations of the contractors method of valuation

There are certain limitations to this method. There can be a huge difference in the valuation of two different appraisers for the same property. Hence, this method is applied when no other method of appraisal is applicable. In case two appraisers are appointed for a property and there is a difference in their values, then a medium value is taken to be the final value. Sometimes, this method is used in combination with other methods in a very comprehensive valuation process of a building.

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