Adjusting comparables Flashcards
Adjusting comparables.
Rules:
Never adjust the subject!
If the comparable is superior to the subject, subtract value from the comparable.
If the comparable is inferior to the subject, add value to the comparable.
The subject has a $10,000 pool and no porch. A comparable that sold for $250,000 has a porch ($5,000), an extra bathroom ($6,000), and no pool.
Adjustments to comp: $250,000 (+10,000 - 5,000 - 6,000) = $249,000 indicated value of subject
A comparable has 3 bedrooms and the subject has 4.
The appraiser estimates the value contribution of a bedroom to be $10,000.
Adjust the comparable by entering +$10,000 in the CMA.
Gross Rent Multiplier
The Gross Rent Multiplier is an appraisal method for single family or duplexes based on the gross monthly rent.
Examples
What is the value of a house with monthly rent of $1,200 and a GRM of 112?
$1,200 rent x 112 GRM = $134,400
What is the GRM of a house with monthly rent of $1,200 and a value of $134,400?
$134,400 price ÷ $1,200 rent = 112 GRM
Gross Income Multiplier
The Gross Income Multiplier is a method of appraising income-producing properties based on a multiple of the annual gross income.
Formula
Gross income multiplier = sales price/annual income
Sales price equals annual income times GIM
Annual income = sales price/GIM
Examples
What is the value of a commercial property with an annual income of $33,600 and a GIM of 9.3?
$33,600 income x 9.3 GIM = $312,480
What is the GIM of a commercial property with annual income of $33,600 and a value of $312,480?
$312,480 price ÷ $33,600 = 9.3 GIM
Cost approach formula
Cost Approach is another value method based on the principle of substitution; the value of a building cannot be greater than the cost of purchasing a similar site and constructing a building of equal value.
Formula:
Value = Land value + (Improvements + Capital additions - Depreciation)
Example
Land value = $50,000; home replacement cost = $150,000; new garage added @ $30,000; total depreciation = $10,000
Value = $50,000 + (150,000 + 30,000 - 10,000) = $220,000
Depreciation
Depreciation is a decrease in value due to physical deterioration, functional or economic obsolescence.
Annual depreciation= beginning depreciation basis/ depreciation term number of years
Depreciable basis = initial property value plus any capital improvements - land value.
Example:
Property value = $500,000; land value = $110,000; depreciation term = 39 years
Step 1: ($500,000 - 110,000) = $390,000 depreciable basis
Step 2: ($390,000 ÷ 39 years) = $10,000 annual depreciation
A comparable property has 4 bedrooms and the subject has 3 bedrooms. If bedrooms are valued at $30,000, how would you adjust a CMA to account for this?
Subtract 30,000 from comparable unit.
An apartment building that sold for $450,000 had an annual income of $62,500. What is its gross income multiplier?
$450,000/$62,500 = 7.2 GIM = Price / Annual Income. Thus, $450,000 / $62,500 = 7.2
A rental house has monthly gross income of $1,200. A suitable gross rent multiplier derived from market data is 117. What estimated sale price (to the nearest $1,000) is indicated?
$1,200 times 117 = $140,400
GRM = Price / Monthly Income. To solve for price convert the formula to Price = GRM x Monthly Income. Thus, (117 x $1,200) equals = $140,400, or $140,000 rounded.
A property is being appraised by the cost approach. The appraiser estimates that the land is worth $10,000 and the replacement cost of the improvements is $75,000. Total depreciation from all causes is $7,000. What is the indicated value of the property?
Cost Approach formula: Land + (Cost of Improvements + Capital Additions – Depreciation) = Value. Thus you have $10,000 + ($75,000 - 7,000), or $78,000.
A property is purchased for $200,000. Improvements account for 75% of the value. Given a 39-year depreciation term, what is the annual depreciation expense? $3,846 $5,128 $6,410 $8,294
Since only the improvement portion of the property can be depreciated, the depreciable basis is $200,000 x 75%, or$150,000.The annual depreciation expense is $150,000 / 39 years, or $3,846.
Income Capitalization Formula
The Income Capitalization Formula determines the rate of return considered to be a reasonable return on investment - given the risk.
Formula
Value=Annual net operating income/Capitalization rate
Capitalization rate= Annual net operating income/Value
Annual net operating income= ValueXCapitalization rate
Examples
A property generates $490,000 net income and sells at a 7% cap rate. What is its value?
$490,000 ÷ 7% = $7,000,000 value
A property has a net income of $490,000 and sells for $7,000,000. What is its cap rate?
$490,000 ÷ 7,000,000 = .07, or 7%
A property’s value is $7,000,000 and the cap rate is 7%. What is the property’s Net Operating Income?
$7,000,000 x .07 = $490,000
Net Operating Income (NOI)
The Net Operating Income is another approach to calculating value which is the gross income less all operating expenses.
Formula:
NOI = Potential Gross Income - Vacancy loss + Other income - Operating expenses
Note: Operating Expenses do not include mortgage payments!
Example
An apartment building has 24 apartments that rent for $500 per month. Vacancy rate is 5% and laundry vending income is $300 per month. Operating expenses equal 40% of potential rent.
What is the NOI?
Potential Gross Income –$500 X 24 units X 12 months = $144,000
Vacancy –$144,000 x 5% = $7200
Laundry income – $300 per month X 12 months = $3,600
Effective Gross Income –$144,000 - $7,200 vacancy + Laundry income $3,600 = $140,400
Operating Expenses – $144,000 X 40% = $57,600
Net Operating Income – Effective Gross Income of $140,400 - Operating Expenses of $57,600 = $82,800
If gross income on a property is 30,000, net income is $20,000 and the cap rate is 5%, the value of the property using the income capitalization method is
$600,000.
$400,000.
$6,000,000.
$4,000,000.
Remember that value is calculated using the NOI of a property, not the gross income. Value = NOI / Cap rate. So, Value = $20,000 / 0.05 = $400,000.
A property is being appraised using the income capitalization approach. Annually, it has potential gross income of $30,000, vacancy and credit losses of $1,500, and operating expenses of $10,000. Using a capitalization rate of 9%, what is the indicated value (to the nearest $1,000)?
$206,000
$167,000
$222,000
$180,000
Remember the formula for calculating value, Value = NOI / Cap rate. First, determine the net income by subtracting out vacancy and expenses from the potential gross income, $30,000 – 1,500 – 10,000 = $18,500 NOI. Next, divide $18,500 by the capitalization rate, 0.09: $18,500 / 0.09 = $205,555, or $206,000 rounded.
A building has 5 office suites generating annual potential rent of $20,000 each. If the annual vacancy rate is 10% and the annual expenses are $45,000, what is the NOI?
$20,000 per unit x 5 = $100,000 potential gross income. Next, subtract the 10% vacancy rate: $100,000 - $10,000 = $90,000. Then subtract the $45,000 for expenses: $90,000 - $45,000 = $45,000 NOI.
