Real Estate Valuation and Analysis
Classified in Economy
Written at on 
English with a size of 5.06 KB.
Regional Dynamics
Speculative Housing Bubbles
Regional Comparative Advantage
- Natural Advantages
- Employee Characteristics
- Access to Transportation
- Quality of Life
Base & Service Industries
Location Quotient (LQ) > 1 is a base industry, LQ < 1 is a service industry
Housing Supply
- Housing Starts
- Existing Home Sales
Local Supply Influences
- Interest Rates
- Zoning
- Building Codes
- Land Terrain
Neighborhood Influences
- Public Goods
- School Quality/Capitalization Effect
- Public Services Provided Relative to Taxes Paid
Sales Comparison (Market) Approach
The "subject" is the property being appraised. "Comparables" are recently sold, similar properties.
Estimate the value of the subject by adjusting the sales price of the comparable for any differences.
Subject Value Estimate = Comparable Sales Price ± Feature Differences
Cost Approach
Subject Value Estimate = Cost New - Depreciation + Land Value
- Physical Depreciation
- Functional Obsolescence
- External Obsolescence
Depreciation is often estimated straight-line.
Income Approach
Gross Rent Multiplier ("GRM")
Subject Value Estimate = GRM x Rental Income
Appraisal: Qualifying the Property
- The sales comparison approach is most effective for active residential markets.
- The cost approach is most effective for special-use property or newer homes.
- The income approach is most effective for cash-flow-generating property.
Distressed Property
Below Market Value Property
Reasons
- Financial
- Legal
- Personal
Financial Framework
- Acquisition Phase
- Holding Period Phase
- Disposition Phase
- Profitability
Acquisition Phase
- Information sources for distressed property
- Legal Research: Title Quality
- Auction Process
- Lenders at Auctions
- Equitable Rights
- Market Research
- Inspections
Holding Period Phase
Financial Issues
- Renovation Cost
- Interest or Other Carrying Costs
- Taxes and Insurance
Disposition Phase
- Selling
- Renting
- Occupying
Valuation Fundamentals
Market value is the most probable price, given the following conditions:
- Buyer and seller are typically motivated.
- Parties are well informed/well advised and acting in their best interest.
- Reasonable time in the market.
- Payment in cash or its equivalent.
- Traditional financing
The Appraisal Process
Performed by appraisers and others seeking to establish value.
- Physical and legal identification
- Identify property rights to be valued
- Specify the purpose of the appraisal
- Specify effective date of value estimate
- Gather and analyze market data
- Apply techniques to estimate value
Income Approach
There are three methods for the income approach:
- Gross Income Multipliers ("GIM")
- Direct Capitalization Method
- Discount Present Value Method
Considerations When Determining R
- Consider the comparables.
- Similarity to subject
- Physical attributes
- Location
- Lease terms
- Operating efficiency
Note: For any two properties that you compare, the higher the cap rate, the lower the value, given the same amount of NOI.
Consider the Comparables
- How is NOI determined?
- Stabilized NOI
- Nonrecurring capital outlays
- Lump sum
- Averaged
- Was NOI skewed by a one-time outlay?
Depending on the analyst, leasing commissions, tenant improvements, and recurring capital outlays may or may not be included in the calculation of net operating income.
3rd Income Method: Discounted Present Value
- Compute the present value of future cash flows.
- Forecast NOI
- Choose holding period
- Select discount rate based on risk and return of comparable investments (r)
- Determine reversion value of property
Sales Comparison Approach
- Use data from recently sold "comparables" to derive a "subject" market value.
- Adjust comparable sales prices for feature, age, and size differences, etc.
- Lump-sum adjustments and square foot adjustments
Subjective process
Highest & Best Use
Land prices are volatile relative to income-producing real estate.
The land price is determined by its highest and best use, which is the use that results in the highest residual land value.
Cost Approach
- Estimate the construction cost if new.
- Account for physical deterioration, functional obsolescence, and/or external obsolescence.
- Add land cost