Real Estate Appraisal - REAL_4820 (1).pdf - Real Estate Appraisal REAL*4820 Lecture 1 Introduction to Appraisal Real Estate Values Decision making in

Real Estate Appraisal - REAL_4820 (1).pdf - Real Estate...

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Real Estate Appraisal - REAL*4820 Lecture 1 - Introduction to Appraisal Real Estate Values: Decision making in commercial real estate centers around valuation Market Value: Most probable selling price, assuming “normal” sale conditions Value for the “typical” market participant Investment Value: Value to a particular individual (investor) Transaction price: Price actually paid for specific property When are real estate values needed?: Values changing over time Property acquisition is contemplated When a structure is: Modernized, Renovated, Abandoned, Demolished Site is developed Property is used as collateral for a loan Who uses market values appraisals: Buyers, sellers, corporate acquisitions or dissolutions, courts (divorces, eminent domain cases, settlement of estates, bankruptcy), mortgage lenders Estimating market value In markets with perfect competition and investment value revelation, all transactions take place at true market value Market value continuously revealed by transaction prices of perfect substitutes Different investment motivations of buyers/sellers and their negotiation abilities have no role in the price formation process Features of Investment Factors affecting demand Needs for access - location! Non-locational factors Housing Commercial Offices What do investors expect? Cash flow - make $ through operations. Impacted by immobility, longevity, indivisibility Capital appreciation - make $ through sale of asset
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Tax shelter - decrease income tax load Market Analysis Not average asset market: Inelastic supply Localization High information and transaction costs Discontinuous price information Government intervention Efficiency of Real Estate Markets Perfectly competitive markets in economics imply: Free entry & exit No capital or information barriers Lots of buyers/sellers Investment Characteristics Advantages: High returns Financial leverage Tax shelter Inflation hedge Disadvantages: Interest rate risk Financial risk Illiquidity Management intensive Appraisal: Three approaches to value 1. Income approach (including DCF) 1.1. Project a “typical” annual income. Capitalize at appropriate discount rate. MV = N0I/k (MV = market value, N0I = Net Operating income, k = capitalization (discount) rate) 1.2. Discounted Cash Flow (DCF) = Used for investment analysis and appraisal. Projection of after-tax, after financing cash flow for N years, plus the residual value of the property at the end of the Nth year, discounted at an appropriate rate. (N = holding period for investment, Residual value = cash left after sale [after repaying debt and paying taxes due on sale]) 2. Sales comparison approach 2.1. Determine the value of an asset based on analysis of recent sale prices of similar properties. Must adjust comparable properties for non-comparable features.
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