, 68 - Friday, November 13,. 1998 - North Shore News

Value is a personal call

; From page 59

3% protit AS SOOT aN they tin.
However i is this really the
ue. ase?
When a project of 125
‘units is sold with cach unit
being sold at 5% below mar-
ket, future sales will be valued
by using the comparison
spproach. Thus an eppraiser
will look back and see 125
units sold at the price vou paid
(not aware that the price
paid was marl
‘and thus de!
value is what vou acti
‘tor it, In this manner, develop-
ers can inadvertently drive
down the value of surrounding
© Property.
Ifyou are looking av
acquiring 3 proy
© Market value,
price vou are paying
legitimate below-market value
and will not be wiped out in
six months time by future”
ee appraisals, ;
(Income or Investment
Method of Appraisal. This
* method of appraisal involves
setting a value through the
:, determination vot a net income

ing th appraisal
in determin-
ing: 1) the annual net operat-
-ing income the property pro-
2) estimating the
d” the market
of property;
and 3) determining the

= price/value thar would be paid ©

ving the net F operating

gon berween what is actually
net monte and a mistaken ner
n have serious rami
ct operating
income or NOT is calculated
using the tollowing vanables:
gross potential income plas
orher income minus vacancy
and bad debi allowance equals
the uross realized revenue
HUN Operating eaperyses sucht
as LaNes, Baten ace, repair
FEPRACEMENE reserves, Water!
Management, Mise
Neous, msuranee, ddvertisiny
ete. equals the net operating
income. Note: No allow,
for income tay, debt ser
or depreciation i

ine
P fiture can
NOL, TI
yield an investor requires in
purch asing thar income stream

. tion™ nite or ¢ pP rat

therefore offen determines the
price the investor.will pay tor a
particular proper
Mathematically, the value () is
determined by dividing the net
operating income (NOL) by
the capitalization rate (R) to
create the price_or value the
purchaser must pay to create
the di 1 vield. (ic. NOI/R
= Price or Value) ~

For example: Let us assume
that a property has an NOT of
$25,000 and the current vield
( Ryi inve tors demand in this

$s 8% (08). Based on this

information the value or price
would be cafculated a:
NOT ($25,000)/R (08

Value (5 312,500.)

was 26,300 and vield required
was 64? $26,500.06 =
S441066
Ou ean sec. by raising
Ye by just $1,500 the
or the property, based on
viek! Cor cap rate phas

oe

YW is acctirate is so ert:
cal Tt vou know the NOT

Rand if sou know
and the yield
vou ‘want het by using this
formula vou can determize
miu”

Points te remember in
using capitalization rates: 1}
ensure the NOT is carreetly
calculated: 2) the lower the
weap rate” the higher the
Price; 3} cap rates aysume a
current position ~~ that
income and ENPETINES Never
Tise; 4) it assumes vou are pay-
ing cash for the property:
allows no time valuc to the
value of money; 6) notice how
$1 ofinereased NOT aticets

erties — do not use it as an

technique; $)
whether the NOL is increased
from added income or by
reducing expenses, the
increase in value /price is still
the same.

Remember, it’s a net
income world and assigning
value is usually a personal
judgment. what is the
value ofa — or tor that

. Marter the information con-

tained my weekly
columr

+ — Michael Downy: 925+
6453

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