Principles Of Valuation.com



We will wrap up the course with an exposure to the determination of cash flows using accounting principles. The main focus in this building block will be on individual/personal decisions because of two reasons: (a) we learn when we see value to us as individuals and (b) the beauty of finance is that the building blocks of finance are applicable. Value is determined at a specific point in time. It is a function of facts know and expectations made.

  1. Principles Of Valuation Real Estate Pdf
  2. Valuation Principle And Financial Managers

There are many aspects of real property consulting. Without suggesting any limitations, this concept may include valuation, use strategies, feasibility studies, litigation strategies, academic pursuits, and forecasting and strategic implementations. Even these examples can be expandedand refined. However, a common thread in each real property discipline is the need to understand the interrelationships between forces of economics, law and the marketplace on real property. The reliance on various Principles allows for a focused and disciplined approach to the requisite analyses and interaction between the various tangents that real estate consultants may pursue.Furthermore, a common understanding will enhance communication between consultants and their clients. In order to achieve use of the CRA or AACI designation, the candidate must have experience and be proficient in the First Principles of property value.

Principles Of Valuation Real Estate Pdf

Principle of Substitution

No prudent buyer will pay more for a properly than it would cost to acquire an equivalent substitute property of equal utility. (The Cost and Sales Comparison Approaches rely on the Principle of Substitution.)

Principle of Anticipation

The value of property is affected by the potential future benefits of its ownership. (The Income Approach relies on the Principle of Anticipation.)

Principle of Conformity

The value of a property is enhanced when the uses of surrounding properties conform to the use of the subject property.

Principle of progression/Regression

Progression is the increase in value of a property that is attributable to its location among more desirable properties. Regression is the decline in value suffered by a properly that is located in an area of less desirable properties.

Principle f Consistent Use

The principle of consistent use requires both the land and the improvement to be valued for the same use, even if they are being valued separately.

Principle valuation & advisory group

Principle of Highest and Best Use

Market value is determined by the most profitable use of the property consistent with the following criteria:

(1) Physically possible

(2) Legally permissible

(3) Financially feasible

(4) Maximally productive

Principle of Competition

Competition occurs when supply and demand are out of balance.

Principle of Change

Supply and demand fluctuate in response to changes in social, economic, and other conditions that influence value. (This is the fundamental reason for the requirement that appraisers estimate value as of a specific date.)

Principle of Balance

Value and production are maximized when opposing or interacting factors are in equilibrium. An imbalance will result in an over improvement or under improvement and consequentially a loss in value.

Principle of Contribution (Contributory Value)

The value of a component, regardless of its cost, is equal to the amount of value it adds to the property as a whole as perceived by the market. (This principle is particularly useful to the Sales Comparison Approach.)

Principle of Surplus Productivity

This principle recognizes the Four (4) Agents of Production:

  1. Land
  2. Labor
  3. Capital
  4. Entrepreneurship

In any enterprise, labor must be paid first. With capital paid after that under the surplus productivity concept. Entrepreneurship is then paid.

This principle forms the basics of residual techniques for estimating land value.

Principle of Increasing and Decreasing Returns

Larger amounts of the Four Agents of Production will produce greater net income up to a certain point at which the maximal value will be developed. Any excess expenditures will not produce a return commensurate with the original investments.

Principle of Supply and Demand

The value of a commodity in a competitive market is determined by the relative levels of supply and demand. The demand for a commodity is created by scarcity. Prices decrease when supply exceeds demand of a commodity and increase when demand is greater than supply.

RENT TYPES

  1. CONTRACT RENT – rent specified in lease
  1. MARKET RENT – rent property would command if it were available for lease in current market
  1. DEFICIT RENT – contract rent is lower than current market rent
  1. EXCESS RENT – contract rent is higher than current market rent

LEASE TYPES

FLAT – fixed rent over entire term

GRADUATED LEASE (STEP-UP/STEP-DOWN LEASE) – rent adjustments at specific times in specified amts.

INDEX LEASE – rent adjustments are tied to market conditions, such as the CPI

GROSS LEASE – lessee pays only rent and no expenses

MODIFIED GROSS LEASE (also called a ‘NET LEASE’) – lessee pays some expenses

NNN LEASE – lessee pays all expenses

GROUND LEASE – a lease in which the tenant leases only the land from the landlord, but the tenant actually owns the building. The tenant, as building owner, is free to sell the building at will and have the buyer assume the existing land lease subject to any and all lease provisions such as creditworthiness standards required for lease assignment, administrative property management fees required for lease assignment, etc.. Term of ground lease is generally the life expectancy of the building.

Valuation Principle And Financial Managers

LEASE TERMS

PERIODIC LEASE – Month-to month lease

TERM LEASE – for a fixed period of time, either short or long term

RENEWAL OPTIONS – allow tenant to renew lease on specified terms after conclusion of the original lease term

If renewal terms favorable to tenant, they am taken into account by appraiser because that is considered ATYPICAL

If renewal terms favorable to landlord, they an ignored by appraiser because that is considered TYPICAL.