Reference no: EM13897412
Contemporary Issues in Real Estate Markets
PRACTICE QUESTIONS
1. How does the Sales Comparison approach estimate the worth of a building?
- It represents what the market has been paying for similar properties. Valuation is viewed as the intersection of supply and demand in actual sales transactions and market transactions are viewed as both supply and demand considerations.
- The appraiser compares prices paid for similar properties. This approach requires recent and comparable sales data for the market in which the subject property is located and is based upon an "adjustment grid" which compares comparable sales and adjusts each sale according to critical parameters.
2. Can the income/DCF approach be used for all properties? Explain your answer.
- The income approach estimates what purchasers would pay for the right to receive the income stream from the real property.
- It cannot be perfectly used for non-income producing properties, but a valuation of "rental" services may provide an estimate.
3. What is the difference between market value and investment value? Explain your answer.
- Market values refer to valuations produced in the open market; investment values are estimates using specific data for individual clients.
- Investment values > market values for individuals who own their properties and do not intend to sell.
- Real estate appraisers estimate market value (MV) and real estate counselors estimate investment value (IV).
4. What does NPV measure? What is the decision rule?
NPV = CF1/(1+r)1 + CF2/(1+r)2 + ..... + CFn/(1+r)n
where r is the cost of capital (discount rate)
CFi is the cashflow payable at time point i
Accept project if NPV is greater than 0.
5. What does IRR measure? What is the decision rule?
0 = CF0 + CF1/(1+IRR)1 + CF2/(1+IRR)2 + ..... + CFn/(1+IRR)n
CFi is the cashflow payable at time point i
Accept if IRR > Cost of capital
6. Do the NPV and IRR methods result in consistent investment decisions? Explain your answer.
- Both NPV and IRR decision rules correctly account for the cost of capital and lead to a consistent (same) accept/reject decision for an investment project. Also, refer to Debate 6 discussion for answer.
- They rank projects differently... refer to Debate 6 discussion for answer.
7. What is the interpretation of the estimated coefficients in a regression equation?
- The estimated regression equation for property valuation gives coefficients that represent the effect of each variable (property characteristic) on the property value. For instance, if the coefficient of the 'Age' variable is -2200, then this implies that each additional year results in a decrease in property value of -$2,200.
8. How can leverage increase the return on an asset? Explain your answer.
The effect of leverage on ROE can be viewed through the following equation:
ROE = ROI + (L/E)[ROI - cost of debt]
ROE is return on equity, ROI is return on investment, L/E is the debt to equity ratio.
L/E acts as a multiplier.
Hence, Leverage may not necessarily be a good bet as it magnifies gains or losses depending on the difference [ROI - cost of debt]
9. How is After Tax Cash Flow (ATCF) calculated in a cash flow analysis for a real estate project?