Approaches to Value 6
External obsolescence
This approach is preferred when reliable market data is available.
Comparative sales approach
Also known as, the capitalization approach.
The income approach
the basic capitalization equation
V = I/R
Valuing property using the Gross Income Modifier (GIM)
Value = Gross Income Modifier x Economic Potential Gross Income
the actual amount of rent a property is earning as specified in a lease.
Contract rent
the total income of a property before deducting vacancy and collection losses or operating expenses.
Potential gross income
the uncertainty involved with any projection into the future.
Risk
the present worth of all anticipated future benefits
value
Deriving overall capitalization rates
Overall Capitalization Rate (OAR) = Anticipated Net Income Before Recapture (ANIBR) / Sales Price
cause by environmental factors, illustrated by encroachment on a residential neighborhood or shifting of the economic base of employment away from a community.
External obsolescence
the return investors demand for forgoing present consumption.
that component of the yield rate that compensates the investor for personal efforts involved in making decisions between alternative investments.
Investments management
Functional obsolescence.
Deriving the gross income modifier
GIM = Sale Price / Anticipated Potential Gross Income
sales prices for short-term rights to use property.
Rents
3 assumptions: value is a function of income; value depends upon the quality and quantity of the income stream ; future income is less valuable than present income
The income approach
means that investors would rather have assets that are readily convertible into cash at face value.
usually expressed in annual terms and includes the income to the property derived from the principal improvements only.
Gross rent
the expenses a typical owner would likely experience
Expenses to be deducted (when processing an income stream)
Valuing property using an overall capitalization rate
Value = Economic Net Income before Recapture and Property Taxes (ENIBR&T) / Overall Capitalization Rate (OAR) + Estimated Ad Valorem Property Tax Rate (ETR)
a basic concept of the income approach
there is a relationship between the income and value or property is purchased for the income it will produce
income that could be expected from a property if available for rent on the open market.
Economic rent or market rent
Constant perpetual; constant terminal; straight line declining terminal; variable income; single income payment
shapes of the income stream
usually expressed in annual terms, and includes income to property from all sources.
Gross income