Valuation of Income Properties: Appraisal and the Market for Capital

Flashcards covering fundamental real estate appraisal concepts, valuation methods (Comparison, Income, and Cost approaches), and market condition factors.

Market Value Conditions

Five key criteria including motivated buyers and sellers, well-informed parties acting in best interests, reasonable market exposure time, payment in US dollars, and price unaffected by special financing or sales concessions.

Appraisal Process

A systematic procedure involving physical and legal property identification, identifying property rights, specifying the purpose and date of value estimate, analyzing market data, and applying valuation techniques.

Sales Comparison Approach

A valuation method based on data from recent arms-length, normal market transactions of highly comparable properties, following the principle that investors won't pay more than what others paid for similar properties.

Gross Income Multiplier (GIM) Method

A valuation method based on the relationship between gross income and sale prices for comparable properties, interpreted as comparable properties selling at $GIM \times \text{current gross income}$.

Potential Gross Income

The total income an income-producing property would generate assuming all space is occupied.

Effective Gross Income

The actual income generated based on occupied space, calculated as potential gross income less vacancies.

Direct Capitalization Method

A technique used when differences in operating expenses exist between comparables, where value is estimated using the formula $Value = NOI \div R$.

Capitalization Rate (R)

A rate calculated by dividing the Net Operating Income (NOI) by the transaction price ($R = NOI \div \text{Price}$).

Discounted Present Value Method

A valuation principle stating that investors will pay no more for a property than the present value of all future Cashflows.

Reversion Values (REV)

The estimated resale price at the end of a holding period, often determined by developing a terminal cap rate based on required rate of return and expected long-term cash flows.

Residual Land Value

The difference between the total property value and the cost of constructing an improvement on a given site.

Highest and Best Use Analysis

An evaluation that determines which use of land (vacant or improved) provides the highest total land value.

Mortgage-Equity Capitalization

A method that estimates property value ($PV$) by adding the present value of expected mortgage financing ($M$) and the present value of the equity investment ($E$), expressed as $PV = M + E$.

Leased Fee Estate

A valuation scenario involving properties purchased with existing leases that feature rents above or below current market levels.

Cost Approach

A valuation rationale that a buyer will not pay more than the cost to purchase land and build a structure, adjusted for physical deterioration, functional obsolescence, or external obsolescence.

Functional Obsolescence

A reduction in an existing building's value within the Cost Approach due to design or utility factors.

External Obsolescence

A reduction in property value within the Cost Approach caused by factors external to the property itself.