The most common appraisal method for commercial property is the income valuation approach, according to Investopedia. This calculation uses the net operating income and capitalization rate to determine property value.
Deriving the net operating income requires first estimating the potential income from the property, then subtracting rental vacancies and operating expenses from the income, explains the CCIM Institute. The cap rate is the property's yearly income divided by the total property value. Appraisers express cap rate as a percent.
The cap rate is prone to problems and misunderstanding, notes CIRE Magazine. Because the calculation is complex and the property values large, even small mistakes impact the property's estimated value. Data services may not provide verified sales data, particularly in states that do not require sales disclosure. Cap rates also use historical data, which does not reflect future value in a volatile market. A 2012 study showed that over 64 percent of commercial property appraisals over-value the property, while 35.5 percent of properties received appraisals that were too low, reports the New York Times.
Much of the data needed to derive NOI and cap rate is available in public records such as property tax listings. Although checking different sources of public records even within the same jurisdiction is time-consuming, free online services such as the public records search at OnlineSearches.com provide a one-stop location for viewing records nationwide.