Real Estate Exam 2

Market Value

Appraised value (based on appraisal)

Transaction Price

The price a property actually sold for

Highest and Best Use

Most profitable or useful use of a property

Reconcilitation

Method of determining value of a property by using appraisers subjective opinion of the methods used to indicate value - > weighing the best methods rather than averaging them

Sales Comparison Approach

Using Comparable recently sold homes to determin market value

Arms-length transaction

no insiders, duress or compulsion /foreclosures

Cost Apprioch

Cost of building materials and land -> used when no comparables

Reproduction Cost

physical replica often used for historic district

Replacement Cost

Equal Utility / closest substitute

Accrued Depreciation

Reduction for physical deterioration, functional obsolescence, and external obsolescence

Physical deterioration

Worn out building

Functional Obsolescence

Out dated design /features or use

External obsolescence

Poor location or area due to external factors (highway built, bright lights, roads)

Income Approach

Value of a property based on the present value of its future cash flows

Direct Capitalization

Applying a cap rate or multiplier to a single years cash flows to estimate present value

Discounted Cash Flows

Discounting multiple years of cash flows at a required return to estimate present value

Effective Gross Income Multiplier(EGIM)

Estimates present value as a multiplier and is selling price / EGI

Formula to find value from cap rate

V = NOI/R

Debt Yield ratio

NOI / Total Loan

Debt Coverage

NOI/DS

What do you always put at the end of your ratios and multipliers

% and X

Cap Rate

The overall rate reliant on income producing ability of property R = NOI/V

IRR / DR (Investor Required Rate and Discount Rate)

Minimum return investor needs for a property applied to all future cash flows

Debt Service

Monthly cost of loan

Before-Tax Cash Flow

NOI - DS

Cash on Cash (Equity Dividend Rate)

Cap Rate but for levered cash flows BTCF / REI

Net Income Multipler

How many times NOI fits into Value Purchase price / NOI

Operating Expense Ratio

OE/EGI - > typical range is 25%-50% will vary alot

Treatment of CAPX regarding NOI

Might be above the line or below traditionally below but recently has been put about for more transparency, major expenses stay below

Why do investors borrow

Magnified returns, Diversity, financial need

Risk

the uncertainty of future cash flows

Bundle of rights

A concept describing all the legal rights that attach to the ownership of real property Include the right to possess, occupy, lease, sell, use, encumber, exclude, enjoy , dispose, and devise by will, amongst others

Difference between BTCF and NOI

Leveraged cash flow vs unlevered cash flow

Cap Rate equation

NOI / Value

Equity dividend rate equation

BCTF / REI

Net income multiplier

Value / NOI

EGIM equation

Value/EGI

Operating Expence Ratio equation

OE/EGI

Loan to Value ratio equation

Loan/Value

Debt Coverage ratio equation

NOI / DS

Debt Yield Ratio Equition

NOI / Loan Amount ( No Interest )

Future Value equation

PV * (1+r)^n

Present Value Equation

FV / (1+r)^N

Lump sum

1 payment done once

Ordinary Annuity

Consistent payment schedule where fixed payments are due at the end of each month for a definite period of time

Compunding

Interest on Interest

Discounting

Opposite of compounding

Net Sales Proceeds

Amount of money you get from selling property

NPV Net present value

Initial investment(negative) + All future cash flows discounted(DCF and NSP)

Market value vs investment value

Objective vs subjective