Property Appraisal & Valuation
Key Terms
1. Market Value
The Price at which a willing Buyer and a willing Seller, without undue pressure, would Buy and Sell a particular Property, as of a particular Date.
2. Appraisal
An estimate or opinion of Property Value, for a particular Purpose as of a particular Date, by a particular appraiser. The three primary Appraisal Methods are: Sales Comparison, Capitalization of Income, and Replacement Cost. Each of the three Appraisal Methods should, in theory, produce a similar Valuation.
3. Sales Comparison (or Comparable Sales)
Compares recent Sales of highly Comparable Properties that are similar in Location, Size, Age, Construction Quality, and other factors. This is generally the only method used for Residential Properties, and one of the three methods used to appraise Commercial Properties.
4. Capitalization of Income
Gross Rent Multiplier, Capitalization of Net Operating Income, and Discounted Present Value (DCF) of projected future annual NOI.
5. Gross Rent Multiplier
Gross Rent Multiplier × Annual Rental Income = Price (or Value). The Gross Rent Multiplier must be derived from the GRMs on Sales of Comparable Properties. This simple method is often used for valuing Apartments.
6. Capitalization of NOI
NOI ÷ Cap Rate = Price (or Value). The Cap Rate used must be derived from the Cap Rates on recent Sales of Comparable Properties. Cap Rates are affected by the Supply and Demand forces on the Property Markets and by Interest Rates, with increasing Demand relative to Supply lowering Cap Rates, and falling Interest Rates lowering Cap Rates, and vice versa.
7. Discounted Present Value (DCF)
Typically a 10-year cash flow model is created. The Discount Rate used (or required Internal Rate of Return) is based on the Buyer's assessment of the Risk of achieving the projected future NOI and projected future Sale Price relative to current alternative Investments and Capital Market benchmarks.
8. Replacement Cost
The sum of Land Value + Depreciated Replacement Cost of the Building. Depreciation of the Improvements can come from Physical Depreciation, Functional Obsolescence, or External Obsolescence. The Land Value is derived from a Comparable Sales analysis of similar Land parcels. The Replacement Cost approach is most reliable when the improvements are relatively new and do not suffer from significant Depreciation or Obsolescence. Land Value "Highest and Best Use" analysis to determine
the value of a particular Land site, whether the Land is Vacant or Improved. Land might be worth more if the Improvements are actually demolished.
9. Comparative market analysis
The property evaluation that determines property value by comparing similar property sold within the last year
10. Cost approach
A method of estimating the value of real property by calculating a current construction cost, subtracting the cured depreciation and adding a Linville you obtained from the market. This method works best with improvements are relatively new estimates of depreciation us more likely to be accurate.
11. Income approach
An appraisal technique whereby the value of an income producing property is estimating by capitalizing it's net operating income using an appropriate capitalization rate. Value = income/rate (tax.ny.gov- glossary)
12. Property management
Property Management – The administration of residential, commercial and/or industrial real estate.
Property management typically involves the managing of property that is owned by another party or entity. Property managers are typically paid a fee and/or a percentage of the rent brought in for the property while under management.
13. Mortgage commitment.
Mortgage Commitment – A written notice from the bank or other lending institution saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house.
14. Capital Gain
A profit that results from the sale of a property where the amount realized from the sale exceed the purchase price.
