Application Of The Approaches To Value Flashcards
What are the elements of comparison in the Sales comparison approach?
TRANSACTIONAL ADJUSTMENTS Property rights conveyed Financing terms Conditions of sale Expenditures made immediately after sale Market conditions
PROPERTY ADJUSTMENTS Location Physical characteristics Economic characteristics Zoning, highest/best use, utility Non-realty components
What are the applications to approaches to value
Sales comparison
Income Capitalization
Cost Approach
How are adjustments made in the Sales Comparison Approach?
Comparable property is Superior= decrease
Comparable property is Inferior= Increase
What are the five steps in the Sales Comparison Approach?
Research market Verify information Select relevant units and develop comparative analysis Compare comparables Reconcile
What are the calculations to the Income Capitalization Approach?
PGI (@ full occupancy) - vacancy/collection losses EGI - OPEX (OE) NOI - debt (Im) (Mortgage Capitalization Rate=Annual debt/Principal) PTCF -Taxes ATCF
In the Income Approach, what is Reversion?
It is the sum an investor is anticipating at the end of the investment period
When is the cost approach to valuation used?
Used for proposed or recent improvements
Represents the highest/best use
What are the eight steps to the Cost Approach to valuation?
Estimate value of land as though vacant (GLADES)
Estimate direct/indirect costs if improvements
Estimate entrepreneurial incentive
Cost + incentives = total cost
Estimate depreciation from the three sources (physical, functional and external)
Depreciation - Total Cost = Estimate of depreciated cost of improvement
Add “as is” value of improvements
Land Value + Depreciated Costs
What are the direct/indirect costs if improvements from the Cost Approach?
Reproduction
Replacement
Direct (hard)
Indirect (soft)
What are the three methods to estimating costs?
Comparative Unit = $/SQFT
Unit in Place = adding unit costs taken from a cost estimating service
Quantity Survey - quality/quantity of all materials used, added together
What are the three sources of depreciation from the Cost Approach?
Functional Obsolescence
Physical Deterioration
External Obsolescence
What are the different ages of property used in the Cost Approach?
Economic life - how long it is expected to stand
Remaining Economic Life - estimated period that improvements continue to contribute to property value
Effective Age - age of property based on observed deterioration (personal opinion)
Actual Age
What are the three methods of depreciation used in the Cost Approach?
Market Extract Method
Age-Life Method
Breakdown Method
Explain the Market Extract Method to depreciation
It relies on comparable sales
Separates the component parts from the whole
What are the steps to the market extract method of depreciation
Select similar improved properties
Adjusts sales for financing/ rights conveyed
Subtract value of the land
Estimate cost of improvements
Calculate lump sum of depreciation
Calculate % of depreciation
Calculate % of annual rate of depreciation (% depreciation/Actual Age)
