UNIT 2. VALUATIONS METHODS

INCOME FOCUS
1. DEFINITION
  1. It is a type of real estate evaluation method that allows investors to estimate the value of a property based on the income generated by the property
    1. USE
      1. It is typically used for income generating properties and is to evaluate real estate.
        RECOMMENDATIONS
        The approach uses the income generated by the property to estimate fair value.
        It is calculated by dividing the net operating income by the capitalization rate.
        A buyer should pay special attention to the state of the property, operational efficiency and vacancy when using the income approach.
        EXAMPLE
        With the income approach, an investor uses comparable market sales to choose a capitalization rate. For example, when valuing a four-unit apartment building in a specific county, the investor looks at recent sale prices of similar properties in the same county. After calculating the capitalization rate, the investor can divide the NOI of the rental property by that rate. For example, a property with a net operating income (NOI) of $ 700,000 and an elected capitalization rate of 8% is worth $ 8.75 million.
BY ANA FERNANDA CARABALI G. GROUP:FIFTY
REAL OPTIONS
1. DEFINITION
  1. It is an option available to a company's managers regarding business investment opportunities. It is known as "real" because it usually refers to projects that involve a tangible asset rather than a financial instrument.
    1. USE
      1. By analyzing the real value of the options (ROV), managers can estimate the opportunity cost of continuing or abandoning a project and making decisions accordingly.
        RECOMMENDATIONS
        Actual options may include the decision to expand, defer or wait, or abandon a project.
        Actual options refer to projects that involve tangible assets versus financial instruments.
        Companies make decisions or options that give them flexibility and potential benefits when making future decisions.
        EXAMPLE
        McDonald's Corporation (MCD) has restaurants in more than 100 countries, and let's say the company's executives are considering the decision to open additional restaurants in Russia. The expansion would fall into the category of a real option to expand. It would be necessary to calculate the investment or capital outlay, including the cost of physical buildings, land, personnel and equipment. However, McDonald's executives would have to decide whether the revenue obtained from the new restaurants will be sufficient to offset any potential country and political risk, which is difficult to assess.
COST APPROACH
1. DEFINITION
  1. It is a method of real estate valuation that assumes that the price that a buyer must pay for a property must be equal to the cost of building an equivalent building. the market price of the property is equal to the cost of land, plus the cost of construction, less depreciation
    1. TYPE SUSE
      1. Reproduction method: This approach considers that a replica of the property is built and pays attention to the duplication of original materials.
      2. Replacement method: In this case, it is assumed that the new structure has the same function as the newer materials, using current construction methods and an updated design.
      3. RECOMMENDATIONS
        The cost approach is considered less reliable than other real estate valuation methods, but it can be useful in certain cases.
      4. EXAMPLE
        Special use properties
        Determine the value of buildings for exclusive use, such as libraries, schools or churches. These resources generate little income and are not usually commercialized, which invalidates income and comparable approaches.
        New construction
        Construction lenders require cost approach assessments because any market value or income value depends on the standards and the completion of the project.
        Commercial property
        A cost approach can be implemented when design, construction, functional utility or quality of materials require individual adjustments.
MARKET APPROACH
1. DEFINITION
  1. It is a method to determine the value of an asset based on the sale price of similar assets. Study recent sales of similar assets, making adjustments for differences between them.
    1. USE
      1. The market approach excels in situations where there is abundant data available on comparable transactions. When such data is not available, alternative approaches may be required.
      2. Because the market approach is based on comparisons with similar assets, it is most useful when there is substantial data available on recent sales of comparable assets.
      3. ADVANTAGE AND DISADVANTAGE
        It is based on publicly available data on comparable transactions. As such, it may require less subjective assumptions than alternative approaches.
        It may be impractical in situations where there are few comparable transactions, as in the case of a private company that operates in a niche market with few competitors.
        EXAMPLE
        When we search the market to buy a new apartment. We found a list of an apartment in your preferred neighborhood that is offered for $ 200,000. The unit is a 1 bedroom, 1,000 square foot apartment with 1 bathroom. It is in good structural condition but requires some minor renovations. Although you are in a desirable neighborhood, your view is obscured and you don't have a washer or dryer in the room. Even if you like the apartment, you feel that the initial price is too high. Since the apartment has been on the list for more than a month, it begins to suspect that if it makes a fair offer, the seller could accept it even if it is below its sale price. To that end, he dedicated himself to determining the fair market value of the apartment by looking for examples of similar apartments in the same neighborhood that were sold in the last year.

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UNIT 2. VALUATIONS METHODS

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	Created by ANA FERNANDA CARABALI GONZALEZ over 4 years ago