UGBA 180 Chapter Notes - Chapter 20: Sales Comparison Approach, Earnings Before Interest And Taxes, Gross Income
22 May 2018
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Chapter 20: Valuatio of Icoe Properties – Appraisal &
the Market for Capital
• Market value: the most probable price which a property should bring in a competitive and open market under all
conditions requisite to a fair sale
• Appraisal: an estimate of value that is used as a basis for lending and investing
• Sales comparison approach to value: based on data provided from recent sales of properties highly comparable to
the property being appraised.
o These sales ust e ar’s-legth trasatios or sales etee urelated idiiduals. They should
represent normal market transactions with no unusual circumstances (ie: foreclosure, sales involving public
entities)
o The rationale for the sales comparison approach lies in the principle that an informed investor would never
pay more for a property than what other investors have recently paid for comparable properties.
• Income approach to property valuation: based on the principle that the value of a property is related to its ability to
produce cash flow
o Gross income multiplier and direct capitalization methods, rely heavily on current market transactions
involving the sale of comparable properties.
o Gross income multiplier
▪ Gross income multiplier: relationships between gross income and sale prices for all comparable
properties that are applied to the subject property
▪ GIM = sales price/gross income
▪ Potential gross income: assumes all the space is occupied
▪ Effective gross income: based on occupied space (potential gross income less vacancies)
▪ Not good for smaller, older properties in which information about operating expenses may not be
available
o Capitalization rate
▪ Net operating income: obtained by subtracting operating expenses from rents reported on the
comparables at the time of sale
▪ Capitalization rate (R): NOI/transaction price
▪ Choose a cap rate that is most similar to the comparable property
▪ The question of whether or not it is a good investment will depend on the future growth in rents,
income, and property values
o Discounted present value method: differs considerably in that a forecast of future income production and
expected investment return is used
▪ Based on the principle that investors will pay no more for a property than the present value of all
future NOIs
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