UGBA 180 Lecture Notes - Lecture 7: Shortage, Gross Income, Land Values
25 Jun 2018
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Lecture 7: Valuation
Role of Appraisal
●Purpose: determine a property’s market value
○Market value: the most probable price a property should bring in a competitive
and open market under all conditions requisite to a fair sale
●Clearly important from an investment perspective
○Buyer doesn’t want to “overpay”
○Also need an accurate estimate of the resale value
●Other uses
○Forms the basis of the lending decision
■Prevent over borrowing
○Valuation for insurance purposes
○Property tax assessments
○Investment performance reports
●Process
○Ascertain the physical and legal identification of the property
○Identify property rights to be values
○Specify the purpose of the appraisal
○Specify effective date of value estimate
○Gather and analyze market data
○Apply techniques to estimate value
●Valuation vs. investment
○Valuation is about making sure that the price on a property is “in line with the
market”
○This is distinct from determining whether or not it is a good investment
3 Approaches
1. Sales comparison
a. Basic idea: use recent sales data from comparable properties
b. Recent: need to use sales that occured in current market conditions
c. Comparable: need to use similar properties
c.i. Minor adjustments may need to be made
d. Example
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e. Note: the sales comparison approach is inherently subjective
f. The ultimate numbere will be strongly affected by the specific assumptions made
by the appraiser
g. Not necessarily a problem but a caveat to keep in mind
g.i. Make sure you know what assumptions are being made
g.ii. Evaluate whether they seem reasonable
The importance of good data
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●Valuation is inherently a data intensive exercise
●The output is only as good s the data you feed in
●Think critically about how the process used to generate your appraisal
2. Income Approach
a. Basic idea: value of a property should be based on its ability to produce cash flow
b. 3 tech
b.i. Gross income multiplier
b.i.1.
b.i.2. Calc GIM for recent comparable sales
b.i.2.a. Use as reasonable estimate for GIM property in
question
b.i.3. Estimate gross income for the property in question
b.i.4. Apply GIM formula
b.i.5.
b.i.6. As with sale comparison approach GIM approach relies on
having good data
b.i.7. Are the comparable properties actually a good comparison
to the subject property?
b.i.8. Reliability of this approach depends on comparing like with
like
b.i.8.a. If expenses are very different GIM might not be a
good measure
b.i.9.
b.i.10. NOI = Gross Income - Expenses
b.i.11. Going in cap rates -> use first year NOI
b.i.12. Discounted present value: investors should pay no more for
a project than the PV of all future NOIs
b.i.13. Requires forecasting
b.i.13.a. NOIs over the holding period
b.i.13.b. Reversion value
b.i.14. Market value = (PV of 1) + (PV of 2)
Factors that Drive Cap rates
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Document Summary
Market value: the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale. Also need an accurate estimate of the resale value. Forms the basis of the lending decision. Ascertain the physical and legal identification of the property. Valuation is about making sure that the price on a property is in line with the market . This is distinct from determining whether or not it is a good investment. 3 approaches: sales comparison, basic idea: use recent sales data from comparable properties, recent: need to use sales that occured in current market conditions, comparable: need to use similar properties c. i. Make sure you know what assumptions are being made g. ii. Valuation is inherently a data intensive exercise. The output is only as good s the data you feed in. Think critically about how the process used to generate your appraisal.
