Showing posts with label Capitalization rate. Show all posts

Thursday, December 3, 2009

APOD - How to Construct an Annual Property Operating Data Statement

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APOD - How to Construct an Annual Property Operating Data Statement

The APOD (an acronym for "Annual Property Operating Data") is one of the most popular reports in real estate investing because it gives the real estate analyst a quick evaluation of property performance for the first year of ownership. In fact, it would be surprising not to encounter an APOD in the pursuit of real estate investment property because of its popularity.

In daily life, the Annual Property Operating Data essentially serves as the real estate equivalent of an annual income and expense statement, but more in the capacity of a "snapshot" of a property's income and expenses.

Characteristics

Projects property performance for the first year of ownership only

Ignores tax shelter consideration

The bottom line is cash flow before tax (CFBT), not cash flow after tax (CFAT)

Reveals income, operating expenses, net operating income, debt service, and cash flow concisely and therefore serves investors well as a good "first-glimpse" of the investment opportunity

A well-constructed APOD is best for comprehension, obviously, and the clearer annual property operating data is presented the easier the determination of property performance. In truth, however, the emphasis is on correct numbers, not style. Here's the procedure.

Show the Gross Scheduled Income (GSI) This is the income derived from rents and should represent the annual sum of all rents as if the units were 100% occupied. Include an annual rent even for vacant units; you can use any rent you like (perhaps market rent) just as long as it is realistic.

Show an amount for vacancy and credit loss Deduct this amount from GSI to compute the Effective Gross Income (or EGI).

Show the income generated from other sources (if any) Include things such as laundry income, rents from storage units or garages (if any) and add the total to EGI to compute Gross Operating Income (GOI).

Show the individual operating expenses and total Include expenses required to run the property such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management, advertising, landscaping, and so on. Do not include debt service. Compute a total and label it Annual Operating Expenses.

Deduct the annual debt service (mortgage payment) from NOI This computes the investment property's bottom line, cash flow, or more specifically Cash Flow Before Taxes (CFBT).

Deduct the annual debt service (mortgage payment) from NOI This computes the investment property's bottom line, cash flow, or more specifically Cash Flow Before Taxes (CFBT).

Format of the Annual Property Operating Data statement

Okay, let's consider the entire list from top to bottom so you can see a typical format used in an annual property operating data:

  Gross Scheduled Income (GSI)

  - Vacancy Allowance

  = Effective Gross Income (EGI)

  + Other Income

  = Gross Operating Income (GOI)

  - Operating Expenses

  = Net Operating Income (NOI)

  - Debt Service

  = Cash Flow Before Tax (CFBT)

Special Features

As stated earlier, an APOD is more about substance (accurate financial data) than it is about style and panache. Nonetheless, annual property operating data that also includes computations for cap rate, gross rent multiplier, price per square foot, and cash on cash return are help. Yes, you can exclude the extra effort to include these computations, but it does create annual property operating data that will make you proud to present to customers and lenders.

Please feel free to preview a sample APOD on our website.

Recommended Resources:
ProAPOD Real Estate Investment Software: www.proapod.com

About the author: James R Kobzeff

James developed ProAPOD Real Estate Investment Software to make rental property cash flow, rates of return, and profitability analysis presentations possible in minutes. Discover all the benefits and reports at www.proapod.com

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Tuesday, December 1, 2009

Use a Cash Flow Proforma to Evaluate A Rental Property's Future Cash Flow Performance

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Use a Cash Flow Proforma to Evaluate A Rental Property's Future Cash Flow Performance

By James Kobzeff

A cash flow proforma is a useful way for real estate investors to evaluate an investment property's future cash flow performance. Unlike an APOD, which merely gives a snap shot of the property's first year cash flow, proforma income statements look at revenue and expense projections typically up to ten years, enabling the investor to evaluate the investment real estate's cash flow, tax benefit (or loss), sales proceeds, and other financial projections.

The cash flow proforma income statements is generated by looking at the financial performance of the rental property the year before and then using a variable to make projections into the future.

For example, if:

    Last year's income was $30,000, 
    The operating expenses $12,000, and 
    The net operating income was $18,000 ($30,000 - 12,000),

And you would like to determine next year's net operating income in the event revenue increases 5% and operating expenses increases 4%, you would compute as follows:

Revenue (next year) less Expenses (next year) = Net Operating Income (next year)

Revenue (next year) = $30,000 + (30,000 x .05) = $31,500

Expense (next year) = $12,000 + (12,000 x .04) = $12,480

Net Operating Income (next year) = $31,500 - 12,480 = $19,020

In other words, now you know what net operating income (NOI) you can expect the property to generate in the event that next year, the property's rental income increases (inflates) 5% and its operating expenses increases (inflates) 4%.

This is the essentially the pattern for each year in the proforma, starting with the end of year one and extending out through the end of year ten (i.e., EOY1, EOY2, EOY3, and so on up through EOY10). This year's data is inflated by some variable to compute next year's data.

Moreover, its exactly the same way the computations are made each year for the other returns such as cash flow before tax (CFBT), cash flow after tax (CFAT), sale proceeds after tax (generally requires an inflation rate for property value), cap rate, return on equity, and other returns provided by your specific cash flow proforma. Returns are recalculated annually based on changes made to income, expenses, and property value.

How do I create a proforma income statement?

Software You can invest in a real estate investment software that will automatically create a cash flow proforma income state for you. Bear in mind, however, that software solutions tend to vary and whereas one might include computations for tax shelter, another might not.

Manually You can use an Excel spreadsheet to create a Proforma Income Statement. In this case, it helps to have some knowledge of Excel, and you should allow yourself several hours to create a good proforma.

Whatever method you choose, though, real estate investment software or a spreadsheet, here are a few important considerations to keep in mind about your statement.

Consider what you are seeking to accomplish with the proforma. You want to analyze the cash flow and other performance measures resulting from changes to such variables as income, operating expenses, and property value over future years.

The pro forma is just an estimate (a guess). Do not rely solely upon a proforma income statement to make your investment decision.

Though a proforma can be constructed to project any number of future years, because a it's speculative, you might not want to go out further then ten years (I wouldn't).

Be sure to use realistic numbers. Start with the current income and expenses and inflate them annually by a reasonable amount. Don't inflate income 10%, for instance, when 2-3% has been normal for your market over the past several years.

As stated earlier, a proforma is a good way for a real estate investor or analysts to evaluate the future financial performance of investment real estate. Moreover, it makes a good presentation to other investors and lenders because it does peek into the future.

You can see a sample Proforma on my website at http://www.proapod.com. Follow Software Reports --> Proforma Income Statement.

About the Author

James Kobzeff developed ProAPOD Real Estate Investment Software to help you succeed with rental property analysis. Want to learn more about how to create cash flow and rates of returns in minutes? See it at => http://www.proapod.com

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Click here for an example of a cash flow proforma

Tuesday, November 10, 2009

How To Value Investment Real Estate Using Gross Rent Multiplier & Cap Rate

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How To Value Investment Real Estate

Using Gross Rent Multiplier & Cap Rate

By Bryce Beattie

There seems to be a lot of confusion about how much investment real estate is really worth. Let’s talk about three common ways people figure the worth of their property. Utilizing the Gross Rent Multiplier and Cap Rate are two ways in which property values can be determined.

Pick a Price

This is how most home owners establish a price when the are ready to sell. They simply pick a price based on what they want. Sometimes, they use other area sales as a guide, but mostly it boils down to the fact that they want $200,000 for it and so that’s what they’re asking. If someone else is willing to pay the price, that’s what it’s worth. Factors like “it’s cute” and “it’s so close to the junior high” play a big part.

Inexperienced investors and agents that primarily deal with single family residential properties usually treat apartment buildings, office space, and any other investment-type property in the same way. They just pull a price out of thin air, or say “Well, that ten unit building across town sold for that much, so this one should be worth that much, too.”

This is a dangerous proposition, as these prices are not based on how well the property operates. If you buy into an investment whose price is pulled out of thin air, you are almost always going to end up in a world of hurt. Never invest because you "fall in love" with how cute a property is. Sure, buy a house that way, but never invest that way.

Gross Rent Multiplier

Many times, the price of investment property is based on the gross income times some number. That “some number” is called the gross rent multiplier.

For example, if a seller can get some comps from similar type properties that were recently sold, they can see what those properties sold for. If they can identify how much money the properties were taking in, the seller can take the average and say, “In this area, comparable properties are selling for 3 times their yearly gross income.” That produces a gross rent multiplier of 3. They then take that multiplier and say, “My property takes in $500,000 per year, so it must be worth 1.5 million.”

This is better than just picking a price, but it is still flawed. You see, it doesn’t take into account all of the necessary operating information, notably expenses.

Cap rates

Cap rates are a third (and even better) way to figure the value. They take into account the actual operation of the property. A cap rate is based on the net operating income (NOI) of a property. The NOI is the property income minus expenses, and you don’t count mortgage payments as an expense.

The formula for finding the cap rate is simple:

Net Operating Income / Value = Cap rate

Example:
Let’s say that a property has a net income of $50,000 a year, and it is sold for $700,000.

50,000 / 700,000 = .0714…

.0714 = 7%

So that property was sold with a 7% cap rate.

If you figure out the cap rates for several properties in your area, you can figure out the average cap rate, and use it as a guide when you are looking to buy.

Once you have established a market cap rate, you can figure what the current market value of a property should be. The formula is simple.

Property Value = NOI / Cap Rate

Example:
The average cap rate in your area is 8%, you have an apartment complex that has a net operating income of $43,200.

What can you estimate the market value of your property to be?

43,000 (value) / .08 (cap rate) = $537,500

That of course doesn’t guarantee that you can actually get that much (or pay that little), but it it does show what your property would sell for if it followed you current market trends.

So go practice figuring cap rates and prices. It’s how the real investor figures things.

Bryce Beattie is a real estate investor and the webmaster at http://www.middleclassmillionaires.com

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Property Valuation

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Using Cap Rates For Valuation Can Be Misleading

By Karen Hanover

In a commercial real estate (CRE) discussion you will likely hear the term Capitalization Rate (Cap Rate). You will see that buyers, sellers and lenders use this term to determine the value of a property. You need to know that making an investment decision solely on Cap Rate can mislead you into making a bad investment.

Cap Rate can be considered the percentage return earned on your real estate investment during the first year of operations. It is calculated by dividing the first year Net Operating Income (NOI) by the value of the real estate which is usually expressed as the price of the property. If you're not sure what NOI means, please refer to my previous article "Determining the Value of Commercial Property."

Net Operating Income / Value of Property = Cap Rate

Cap Rate considers the first year NOI in a property. In the same property, the higher the Cap Rate, the greater the NOI from the property will be relative to the price of the property. Think about that for a second. The greater the NOI a property produces, the less money you need for a down payment. This is because lenders base their lending decisions by looking at the NOI a property produces because it is from the NOI that the debt service is paid.

In other words, when a property produces $100,000 of NOI, if the price for that property is $1,000,000, based on a 10% Cap Rate, your payment will be lower than if you had paid $2,000,000 for that property, based on a 5% Cap Rate, right? Absolutely. The payment on $1,000,000 of debt will be less than on $2,000,000. Here, NOI is the same, but the payment will differ based on price. So, for simplicity, the higher the Cap Rate, the greater the cash flows.

Cap Rates can be used as a cursory evaluation of a commercial property. Experienced investors often look at the cap rate to screen properties with low NOI relative to the price, as those properties may not produce enough cash flow to make the mortgage payment. Sellers will quote Cap Rates differently and investors must determine which type of Cap Rate is being advertised by the seller.

There is the actual Cap Rate which is based on the current NOI of the property. That means that the Cap Rate is based on actual NOI the property is currently producing and assumes that no changes to that number will occur.

Sellers will sometimes quote pro-forma or potential Cap Rate to reflect what the purchaser will receive during their first year of operations after certain changes have been made (like increased occupancy for instance). What this means is that after purchase, with certain changes made (increase in rents or decrease in expenses) the property could potentially yield a greater NOI. When the seller has quoted a pro-forma or potential Cap Rate and it is on that potential NOI that price is being determined. DON"T EVER BUY ON PROFORMA CAP RATE!

You wouldn't buy a junker car that's all beat up because after you put money into it to fix it up it will be worth more. Of course not! You would pay for the car in the condition it's in and if you fix it up and can sell it for more, you receive those profits. The same is true in real estate. If the property is only 70% occupied and therefore the income is low, you value it based on that income at 70% occupancy (again see the above referenced article for greater explanation on valuing property).

Let's say that a property could potentially generate $100,000 NOI with zero vacancy (100% leased). If the asking price is $1,000,000 for those cash flows (NOI) then the Cap Rate or return is 10%. On the other hand, let's assume that the property is actually only 80% leased and therefore only generating $80,000 NOI. If the asking price is still the same $1,000,000 for these lesser cash flows (NOI), the Cap Rate or return is only 8%.

The debt service on the $1,000,000 is the same in both examples, but the amount of NOI from which to pay that debt is less in the second example. Again, the higher the cap rate, the greater the cash flow. The greater the cash flow, the more likely the lender will make the loan.

Let's look at it another way: A property is listed for $1,000,000 and is currently 80% leased and generates $80,000 NOI. Rents are $120,000 and expenses are $40,000. Assume that the pro forma income is $100,000 per year when it's 100% leased at current rental rates and that, if rents are increased, the NOI could be $140,000. The seller could display three different Cap Rates for the same property: 1. The seller could use NOI of $80,000 per year making the Cap Rate 8%. This is the correct way to calculate the current Cap Rate. 2. The seller could use NOI of $100 and advertise a 10% Cap Rate. . 3. The sellers could use the pro forma NOI of $140,000 and advertise a Cap Rate of 14%. Although this takes NOI into consideration, it is not actual NOI but potential NOI.

As an investor, you must know which Cap Rate the seller is quoting. The returns of a CRE property come from: appreciation, cash flow, depreciation (tax write-offs), and principal reduction and the use of leverage. Despite all of this analysis of cash flow, often, the biggest chunk of your investment return comes from appreciation. This is in addition to positive cash flows! That's what makes commercial real estate so attractive.

Often properties with the greatest potential for strong appreciation are newer or in good locations and are offered at lower Cap Rates. In other words, they are priced higher. On the other hand, properties that are in poor condition, or have ground leases, are much harder to sell. As a result, a seller may try to attract buyers by advertising a higher Cap Rate. Buyer beware!

The calculation of Cap Rate only considers the first year of NOI. It considers the year after purchase and either bases it on actual or pro-forma NOI. But what if you own the property for longer than 1 year? The Cap Rate doesn't account for multiple year holdings and cash flows and you will therefore want to look at other metrics including cash on cash return and internal rate of return. Again, my article on Determining the Value of Commercial Real Estate touches upon these metrics and their usefulness in insuring a profitable and wealth building investment.

The Cap Rate should not be the only factor considered to determine whether to buy and how much to pay for a property but it is a good way to quickly weed out investments not meeting the investor's criteria or to quickly qualify investments that warrant further analysis.

Take a FREE Online Course! http://www.cieinst.com

Karen Hanover is well known as a Certified Commercial Real Estate Advisor, President of the National Apartment Investors Association, Chairman of the National Commercial Real Estate Advisory Board and Senior Instructor for both the Self Storage Education Institute and the Apartments Education Institute.

As a CCIM Candidate, a highly prestigious designation, often called the "Ph.D. of commercial real estate" Karen works as a busy commercial real estate agent with Marcus and Millichap one of the nation's largest and most highly regarded commercial brokerage firms.

Sought by industry insiders for their toughest deals, Karen has helped thousands to create wealth in commercial real estate with less risk even in today's uncertain economy.

Karen founded the Commercial Investment Education Institute which provides educational instruction for investors on multiple subjects including apartments, self storage, office buildings, retail centers, mobile home parks and more. Her courses are taught in a friendly and easy to understand manner.

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How To Estimate Property Value s Accurately!

By learning how to Estimate Property Value accurately you can save your self a lot of money by not overpaying when you buy!

By Rick Saroukhanian

By not being able to accurately estimate property value they are doing themselves a serious injustice.

That’s because most beginning real estate investors are woefully under capitalized, and they don’t have the deep pockets that are needed to subsidize their overpriced real estate investments.

For many neophyte investors, paying too much for their first investment property usually proves to be a very costly and fatal mistake, and marks the beginning of the end of their foray into real estate. That’s why it’s imperative that you learn how to accurately estimate the current market value of potential investment properties! As far as I’m concerned, it’s the single most important aspect of the entire real estate investment business!

A Fast $50,000 Profit for Knowing the Value of a Condemned House

I had done my homework, and knew the property was worth at least $450,000 after it was cleaned up. I ended up paying $2500 for a six month option to purchase the house for $365,000. It cost me $10,000 to have all of the accumulations removed from the property, and the house, driveway and walkways pressure washed. Three weeks later, I sold my real estate option agreement for a $65,000 profit! This never would have happened if I had been clueless about how to estimate property values. Since I had an accurate estimate as to how much the property was worth in its current condition, I was able to negotiate a below market purchase price that was based on the property’s filthy, neglected, run-down non-marketable condition, and not on how much it might have been worth after it had been cleaned up.

How was I able to quicky estimate the value of this property?

No Kelly Blue Book for Real Estate Investors to Look Up Property Values

Sadly, there’s no Kelly Blue Book equivalent for real estate investors to lookup used property prices in, so you’re going to have to learn for yourself how to estimate the current market value of potential investment properties. However, thanks to computers and the Internet, in most real estate markets it’s not that difficult to get a rough estimate of a property’s current market value. This is especially true for real estate investors located in counties where all property ownership, sale and tax assessment records are available online.

The Definition of Market Value

The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice, defines market value as: “The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.”

The Difference Between Assessed Value and Appraised Value

The difference between a property’s tax-assessed value and its appraised value is as follows:

1. Tax Assessed Value: Tax-assessed value is the value established by the local taxing authority for a parcel of land and the improvements placed upon the land for property tax purposes. For example, in Florida, owner-occupied single-family houses are generally assessed at around seventy percent of their fair market value by county property appraisers.

2. Appraised Value: Appraised value is the value estimate given to a property by a licensed property appraiser using accepted appraisal methods for the type of property being appraised. For example, the accepted appraisal method to accurately estimate the fair market value for an owner-occupied single-family house is the comparison sales method where a property’s value is based on the recent sale of comparable properties within the same area.

The Three Common Methods Used to Estimate Property Values

The three most common methods used by property appraisers to estimate property values are the:

Comparison Sales Method:: The comparison sales method bases a property’s value on the recent sale prices of properties that are within the same area and comparable in size, quality, amenities and features.
Income Method:: The Income Method is used to estimate the value of an income producing property based on the net income the property produces.
Replacement Cost Method:: The replacement cost method is based on what it would cost to replace the improvements on property using similar construction materials and construction methods.

The Comparison Sales Method of Estimating a Property’s Value

The comparison sales method of estimating a property’s value is based on the recent sale prices of properties within the same area that are comparable in size, amenities and features. In order to be accurate, sale price adjustments must be made for comparable properties that have been sold at unrealistically low prices or on overly favorable financial terms not readily available to the buying public.

The Income Method of Estimating a Property’s Value

The income method is used to estimate the value of an income producing property based on the net income the property produces. Under the income method value is calculated using a:

1. Capitalization Rate: The capitalization rate, or cap rate, is calculated by dividing a property’s annual net operating income by its purchase price.
2. Gross Rent Multiplier: The gross rent multiplier, or GRM, is calculated by dividing the purchase price by the property’s monthly gross operating income.

Watch Out for Owners Using Fuzzy Math

A word to the wise: when you read a property’s income and expense statement, you should always go under the assumption that the owner is probably practicing fuzzy math by fudging on the numbers, and telling little white lies to back them up. Also, use a monthly income and expense analysis worksheet like the sample copy below, to cross-check everything that’s listed on a property’s income and expense statement in order to reconcile the statement with receipts and tax returns against what’s shown on:

Schedule E (Supplemental Income and Loss) of the owner’s latest federal income tax return.
The property’s latest annual tax assessment income and expense statement on file at the county property appraiser or assessor’s office.
All of the rental agreements for the past year.
Utilities Statements - Water, sewage, solid waste, gas and electric bills for the past year.
Repair and capital improvement bills for the past year.

The Replacement Cost Method of Estimating a Property’s Value

The replacement cost method of estimating a property’s value is based on the cost of replacing the improvements on the property minus the cost of the land to estimate a property’s value. Replacement costs are calculated on a per square foot basis by dividing the total number of square feet in the building by the per square foot construction cost. For example, a two thousand square foot convenience store that cost $375,000 to build would have a replacement cost of $187.50 per square foot, $375,000 divided by 2000.

How to Get Free Building Replacement Cost Estimates

You can usually get a free building replacement cost estimate by calling a local independent insurance broker who represents insurers that specialize in providing property and casualty insurance coverage for residential and commercial buildings. When you call a broker, tell them that you want a replacement cost quote. Property replacement costs are calculated by using a replacement cost formula that’s based on the property’s geographical location and its:

Street address.
Age.
Type of construction.
Number of stories.
Type of roof.
Current use.
Heating and cooling system.
Square footage.

Use the Eight-Step Approach to Estimate a Property’s Current Market Value

Use the following eight-step approach and the current value worksheet on the following page to get a rough estimate of a potential investment property’s current market value:

Step # 1:: Log onto your county’s property appraiser or assessor’s Web site to obtain the tax assessed value of the property under consideration.
Step # 2:: Search your county’s property tax rolls for recent sales of three to five properties that are comparable in size, amenities and features, and located within two miles of the property under consideration.
Step # 3:: Carefully analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features and the property’s physical condition.
Step # 4:: Verify the income and expenses that are listed on the income and expense statement of the property under consideration.
Step # 5:: Analyze the property’s income and expenses for the past twelve months to estimate its net operating income potential.
Step # 6:: Calculate the property’s capitalization rate by dividing its potential operating income by the estimated value that you derived from analyzing recent sales of comparable properties in step number three.
Step #7:: Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the property.
Step # 8:: Calculate the cost of replacing the improvements on the property using the same building materials and method of construction.

Rick Sarouk is an active nationwide real estate investor and certified appraiser. He has been investing in foreclosure and preforeclosure real estate for the past 18 years. for more information go to http://www.RealEstateInvestorsLife.com for everyday investor resources

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Monday, October 12, 2009

How To Estimate Property Value Accurately!

Image by Let Ideas Compete via Flickr

How To Estimate Property Value s Accurately!

By learning how to Estimate Property Value accurately you can save your self a lot of money by not overpaying when you buy!

By Rick Saroukhanian

As an Certified Appraiser I can tell you that the most common mistake that many beginning real estate investors make is that they pay too much for property. Fact is overpaying for property is often cited as the number one reason why so many newcomers fail to make it as profitable real estate investors.

By not being able to accurately estimate property value they are doing themselves a serious injustice.

That’s because most beginning real estate investors are woefully under capitalized, and they don’t have the deep pockets that are needed to subsidize their overpriced real estate investments.

For many neophyte investors, paying too much for their first investment property usually proves to be a very costly and fatal mistake, and marks the beginning of the end of their foray into real estate. That’s why it’s imperative that you learn how to accurately estimate the current market value of potential investment properties! As far as I’m concerned, it’s the single most important aspect of the entire real estate investment business!

A Fast $50,000 Profit for Knowing the Value of a Condemned House

I once bought a real estate option on a filthy, neglected, run-down, but structurally sound house in a neighborhood-in-transition within Los Angeles, California, that had been condemned for building, safety, health and fire code violations. This place looked like something right out of downtown Baghdad, Iraq! It had what code enforcement inspectors commonly refer to as accumulations of every type of debris, garbage and junk known to mankind! The property’s owner lived in Westerville, Ohio, and wanted the steady stream of threatening letters from the Winter Park Code Enforcement Board to stop.

I had done my homework, and knew the property was worth at least $450,000 after it was cleaned up. I ended up paying $2500 for a six month option to purchase the house for $365,000. It cost me $10,000 to have all of the accumulations removed from the property, and the house, driveway and walkways pressure washed. Three weeks later, I sold my real estate option agreement for a $65,000 profit! This never would have happened if I had been clueless about how to estimate property values. Since I had an accurate estimate as to how much the property was worth in its current condition, I was able to negotiate a below market purchase price that was based on the property’s filthy, neglected, run-down non-marketable condition, and not on how much it might have been worth after it had been cleaned up.

How was I able to quicky estimate the value of this property?

No Kelly Blue Book for Real Estate Investors to Look Up Property Values

The Definition of Market Value

The Difference Between Assessed Value and Appraised Value

The difference between a property’s tax-assessed value and its appraised value is as follows:

1. Tax Assessed Value: Tax-assessed value is the value established by the local taxing authority for a parcel of land and the improvements placed upon the land for property tax purposes. For example, in Florida, owner-occupied single-family houses are generally assessed at around seventy percent of their fair market value by county property appraisers.

2. Appraised Value: Appraised value is the value estimate given to a property by a licensed property appraiser using accepted appraisal methods for the type of property being appraised. For example, the accepted appraisal method to accurately estimate the fair market value for an owner-occupied single-family house is the comparison sales method where a property’s value is based on the recent sale of comparable properties within the same area.

The Three Common Methods Used to Estimate Property Values

The three most common methods used by property appraisers to estimate property values are the:

Comparison Sales Method:: The comparison sales method bases a property’s value on the recent sale prices of properties that are within the same area and comparable in size, quality, amenities and features.
Income Method:: The Income Method is used to estimate the value of an income producing property based on the net income the property produces.
Replacement Cost Method:: The replacement cost method is based on what it would cost to replace the improvements on property using similar construction materials and construction methods.

The Comparison Sales Method of Estimating a Property’s Value

The Income Method of Estimating a Property’s Value

The income method is used to estimate the value of an income producing property based on the net income the property produces. Under the income method value is calculated using a:

1. Capitalization Rate: The capitalization rate, or cap rate, is calculated by dividing a property’s annual net operating income by its purchase price.
2. Gross Rent Multiplier: The gross rent multiplier, or GRM, is calculated by dividing the purchase price by the property’s monthly gross operating income.

Watch Out for Owners Using Fuzzy Math

Schedule E (Supplemental Income and Loss) of the owner’s latest federal income tax return.
The property’s latest annual tax assessment income and expense statement on file at the county property appraiser or assessor’s office.
All of the rental agreements for the past year.
Utilities Statements - Water, sewage, solid waste, gas and electric bills for the past year.
Repair and capital improvement bills for the past year.

The Replacement Cost Method of Estimating a Property’s Value

How to Get Free Building Replacement Cost Estimates

Street address.
Age.
Type of construction.
Number of stories.
Type of roof.
Current use.
Heating and cooling system.
Square footage.

Use the Eight-Step Approach to Estimate a Property’s Current Market Value

Use the following eight-step approach and the current value worksheet on the following page to get a rough estimate of a potential investment property’s current market value:

Step # 1:: Log onto your county’s property appraiser or assessor’s Web site to obtain the tax assessed value of the property under consideration.
Step # 2:: Search your county’s property tax rolls for recent sales of three to five properties that are comparable in size, amenities and features, and located within two miles of the property under consideration.
Step # 3:: Carefully analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features and the property’s physical condition.
Step # 4:: Verify the income and expenses that are listed on the income and expense statement of the property under consideration.
Step # 5:: Analyze the property’s income and expenses for the past twelve months to estimate its net operating income potential.
Step # 6:: Calculate the property’s capitalization rate by dividing its potential operating income by the estimated value that you derived from analyzing recent sales of comparable properties in step number three.
Step #7:: Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the property.
Step # 8:: Calculate the cost of replacing the improvements on the property using the same building materials and method of construction.

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