Lecture_400X_Valuation_fa10

Lecture_400X_Valuation_fa10 - Lecture Topic 3 Basic...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture Topic 3 – Basic Micro-level Valuation
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Three approaches to valuation Sales comparison approach Cost Approach Income approach Direct capitalization method Discounted cash flow method
Background image of page 2
The Sales Comparison Approach An approach to value based on data provided from recent sales of properties highly comparable to the property being appraised. Rationale: No one would pay more for a subject property than others have recently paid for similar properties.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Drawbacks: Arm’s-length sales True Comparability Lack of data Too many adjustments needed Requirements:
Background image of page 4
The Cost Approach Rationale: No investor would pay more for a property than what it would cost to buy the land and build the structure. For a new property: Construction cost + market value of the land. For an existing property: Value based on cost of replacement + MV of land.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The estimate of replacement cost is then reduced by estimating: 1) Physical deterioration 2) Functional obsolescence 3) External obsolescence Cost method cam be very complex when property is not new, but it may be the only option when sales comps and reliable income data are unavailable.
Background image of page 6
The Income Approach Based on the principle that the value of a property is related to its ability to produce cash flow. Requires assumptions about cash flows of the subject property as well as knowledge of the performance of comparable properties.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Pricing of Real Estate Assets: “Cap Rates” (a.k.a yields) What are they? Where do they come from?
Background image of page 8
So what is a cap rate? A way of describing observed prices in the income- producing property market. A descriptor of the relationship between income- producing potential and value. (A multiplier) 1 N N NOI Cap Value + = A property with $1/s.f. of expected NOI that sells for $20/s.f. has an implied cap rate of 5%. We can use this result to value comparable properties.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Three major determinants of cap rates … 1) The Opportunity Cost of Capital (OCC). 2) Risk 3) Growth Expectations
Background image of page 10
1. A: An apartment building in a declining neighborhood. B: An apartment building in a growing neighborhood. 1.
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/08/2011 for the course BUAD 400x at USC.

Page1 / 30

Lecture_400X_Valuation_fa10 - Lecture Topic 3 Basic...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online