Problem 1
1.Separation method incl. includes 3 types of wear:
Physical deterioration
Functional wear
External wear
Physical deterioration - loss of an object’s consumer qualities due to exploitation or natural factors.
Functional wear reflects a decrease in the value of the object due to its non-compliance with modern market requirements for architectural, aesthetic, space-planning, design solutions and other characteristics.
External wear - this is a decrease in the value of an object due to changes in the external environment: social standards of society, legislative and financial conditions, etc.
Physical and functional wear are divided into removable and irreparable.
Removable wear - this type of wear and tear, the cost of eliminating which is less than the added value of the object
Unrecoverable wear - one in which either elimination of wear and tear is impossible, or the cost of eliminating it is higher than the value added, it is taken into account in the amount of wear and tear.
1Multi-storey building without an elevator - functional.
2) The roof of the house is leaking - physical
3) Residential building at the airport - external
4) There is no air conditioning system in the office - functional.
5) Business center without elevator - functional. and so on.
Problem 2
Cost-based approach to real estate valuation
Determine the cost of a land plot using the cost method.
As a result of observations, the need for the following types of routine repairs in the apartments of the rental building was identified: painting - $2,500, replacing carpets in 5 apartments - $1,750, repairing the water supply network - $2,200.
Characteristics of elements with a short service life:
The cost of reproducing the building is $545,930. Physical service life is 5 years. The full service life of the building is 60 years. The number of apartments in the building is 20 years old. The cost of modernizing household equipment is $12,000. The cost of existing household equipment is $7370. The loss in income from one apartment due to a poor floor plan is $10, and due to proximity to an industrial enterprise - $15.
The gross rental multiplier for this sector of the real estate market is 5.
The estimated value of the land plot is $50,000.
1. Physical deterioration
A. Removable:
painting - $2500;
replacement of carpets in 5 apartments - $1,750;
repair of the plumbing system – $2200.
TOTAL remediable physical impairment - $6450.
B. Unavoidable short-term components:
B. Fatal long-term components:
The cost of reproducing the building is $545,930.
Minus: physically fixable – $6450
The cost of reproducing short-term ones is $166,650
Cost of reproducing long-term elements:
545930 – 6450 – 166650 = 372830 $
Wear rate of irreparable long-term components:
372830 * 5/60 = 31068 $
2. Functional wear:
A. Correctable:
Appliance Upgrade ($12,000) – Cost of Existing Appliances ($7,370) = $4,630
B. Irreparable:
Rent losses due to poor floor plan:
3. External or economic wear and tear:
Loss in rent due to the proximity of an industrial enterprise:
The cost of reproducing again is $545,930
Minus: physically removable - $6450
irreparable short-term – $31,700
irreparable long-term – $31,068
functionally correctable – $4630
functionally irreparable – $12,000
external wear – $18,000
The total cost of buildings taking into account wear and tear is $442,082
Estimated cost of area – $50,000
Total price – $492,082
Problem 3
Determine the type and amount of wear for the following elements with a short service life:
Accumulated depreciation = Actual age / normal period * 100
Vel-on depreciation = St-t * % depreciation
In this case, this is irreparable physical wear in short-lived elements, the value of which is 9983
Problem 4
Determine the irreversible physical wear and tear of elements with a long service life if the cost of reproduction of the object is $174,900. The cost of eliminating physical wear and tear is $2,000. The total cost of elements with a short service life is $20,600.
The actual age of the object is 10 years, and the total physical life is 75 years.
174900 – 2000 – 20600 = 152300 $
Izf = 152300 × 10 / 75 = $20306.67
Problem 5
The warehouse has an actual age of 12 years and an estimated remaining useful life of 48 years. The cost to immediately replace the carpet in an office space is $1,000. Due to poor operation, loading platforms have physical wear and tear 25% higher than normal, and their standard useful life is 30 years. The cost to repair the platform is $2,500. The estimated useful life of the roof, electrical system and mechanical equipment is 18 years. Some of the wiring needs to be replaced, which will cost $3,000. What is the extent of irreversible physical deterioration?
Unrecoverable wear = wear of long-term elements + short-term elements of the building = 1250 + 2001 = 3251
1000 rub. - removable physical wear
Problem 6
The building being assessed requires immediate restoration of areas of leaking roofing and painting work. Determine the amount of depreciation if the replacement cost of the roof is $2,500, painting is $1,500, the cost of necessary roofing work is $500 and painting is $1,500. What type of wear occurs in this case?
In this case, this is removable physical wear and tear, the amount of which is equal to the amount spent on repairs. Repairs include the cost of roofing and painting work, as well as painting the roof.
Problem 7
Known that modern standards require the installation of an air conditioner in the building, which is not available in the assessed facility. Installing an air conditioner in an existing building will cost $1,500, and $1,100 in a new building.
Determine the amount and type of wear.
In this case, this is correctable functional wear, the value of which is $400 ($1500 - $1100).
Problem 8
The electrical fittings installed in the assessed building do not meet modern market standards. Determine the type and amount of wear and tear, if the replacement cost of existing electrical fittings is $3,500, its physical wear and tear is $2,000. The cost of dismantling electrical fittings is $1,000 and the cost of installing new electrical fittings is $1,500.
In this case, this is correctable functional wear, the value of which is $4000 ((3500-2000)+1000+1500).
Problem 9
The assessed office building has a storage area of 500 m2. From the point of view of the best use today, it is advisable to use this area as an office space. Determine the type and amount of depreciation if the replacement cost of the warehouse is $8,000. Physical wear and tear – $500. The cost of warehouse liquidation is $800.
In this case, this is correctable functional wear, the value of which is $8300.
Problem 10
The building being assessed does not have a fire suppression system, resulting in a loss of income of $2,000. Determine the type and amount of depreciation if the form of capitalization for these objects is 10%. The cost of installing a fire extinguishing system during the construction of a new building is $15,000.
There is an increase in income by $2000. The capitalized increase in capital gains at a capitalization rate of 10% will be $20,000. (PV=P/r=2000/0.1=20,000) As a result, we have correctable functional wear and tear in the amount of $5,000.
20000 – 15000 = 5000 $
Comparative approach:
Gross rent multiplier
BPM = Sales price / annual (monthly, etc.) income
Total rate of return
OKK = Number oper. income(NP+A)/ Sales price
Problem 11
Market information is available for 3 recent sales of comparable residential properties:
House 1 is the closest in its amenities and location to the property being assessed, but its landscape is better and this difference is estimated at 5,000 euros, the garbage chute is the same as that of the property being assessed, its cost is 16,000 euros. Property 1 was sold 3 months ago.
House 2 has a garbage chute, sold 6 months ago under favorable financing conditions (add 15,000 USD to the price compared to normal financing conditions)
The House 3 is located two blocks from a bus stop, while the subject property is 8 blocks away. It is believed that the bus stop subtracts 3000 cu from the cost of the object. The house was sold 2 days ago and it does not have a garbage disposal.
The price increase for this type of real estate is 0.5% per month.
| characteristic | Having evaluated the object | Comparative object | ||
| Selling price | 490000 | |||
| Date of sale | Now | 1,5% (+9000) | 3% (+22500) | Now |
| Garbage chute | + | + | + | No (+16000) |
| Surrounding landscape | Sufficient | Better (-5000) | Sufficient | Sufficient |
| Financing | market | market | Benefits (-15000) | market |
| Location | custom | The same | The same | Better 6 sq*3000 (-18000) |
| Updated price | ||||
| Number of apartments | ||||
| Apartment price | 24776 | 24160 | 22250 | 24889 |
| VRM | 6 | 6 | 5,9 | 6 |
Updated sales prices:
1) 600000+9000-5000 = 604000 ye
2) 750000+22500-15000 = 757500 ye
3) 450000+16000-18000 = 448000 ye
via VRM= Selling price / Potential output
Selling price = BRM * 85000 = 510000
Price of 1 apartment of the assessed property:
(24160+22250+24889)/3 = 24776 USD
Problem 11
What are the adjustments for differences between garages and for the presence of a fireplace?
Fireplace 78000-76500=1500 ue
Area 83000-78000=5000 cu
Garage 83000-1500-80000=1500 ue
Problem 11
To evaluate the land plot, 3 comparable sales objects were identified:
| Characteristic | Having assessed. An object | Comparative object | ||
| Price | ||||
| Square | 4 ha | 3 ha | 4 ha | 5 ha |
| Form | Normal | The same | Better by -1000 | Worse by + 2000 |
| The soil | Choir | The same | Worse by + 500 | Worse by + 500 |
| Topography | choir | The same | Worse by + 1000 | The same |
| Sales time | Now | A year ago | 6 months ago | 3 months ago |
| Time correction | 2286 (1,5%*12) | 1602 | 922,5 | |
| Updated price for 1 hectare | 4882 | 4995 | 4866,5 | 4784,5 |
| Updated price | 14986 | 19466 | 23922,5 |
Determine the cost of a land plot if the average price increase is 1.5% per month.
Year 1.5*12=18%
6 months 1.5*6=9%
3 months 1.5*3=4.5%
Wed. selling price = (4995+4866.5+4784.3)/3=4882 ye
Cost of the assessed object = 19690 cu
Problem 12
Determine the cost of the property, the rent for which is 125 cu per month.
BRM = 15500/130 =119.2
Avg BRM = 120
Object cost = 120*125=15000 cu
Problem 13.
The property being assessed is located near the airport and is rented for 900 USD. Similar objects under normal conditions are rented for 1200 cu per month. The following sales were identified on the market:
1) at a price of 250 thousand euros with a monthly income of 1000 euros
2) at a price of 300 thousand euros with a monthly income of 1200 euros
3) at a price of 325 thousand euros with a monthly income of 1500 euros
Determine how location changes the value of a property
1. Determine the ratio of gross income to sales price based on recent market transactions GMR = Price / Income
250000/1000=250 c.u.
300000/1200=250 c.u.
325000/1500=216.67 c.u.
2. We determine the loss in income due to the proximity of the property to an industrial enterprise.
1200-900=300 c.u.
3. Find the average BMR value
(250+250+216.67)/3=238.89 c.u.
4. Determine how much the location reduces the cost of the property.
300*238.89=71667 c.u.
Problem 14
The first property, with an area of 185 sq. m, was sold for 72,200 euros, the second property, with an area of 175 sq. m, was sold for 70,800 euros. How much will the market value each additional square meter of living space?
Price 1 sq m = (72200-70800)/10 = 140 cu
Problem 15
Data has been collected (table). The cost of the apartment is estimated at 16,000 dollars. Assess the property based on the cost of rooms, apartments and, based on the gross magnetic material, give a final assessment with justification for the conclusion.
Method of gross rent multiplier (gross income multiplier). The gross rental multiplier is the ratio of the sales price to either potential or actual gross income. The method is carried out in three stages: First stage . The market rental income from the property being assessed is estimated. Second phase. The ratio of gross income to sales price based on recent market transactions is determined. Third stage. The probable value of the property being assessed is calculated by multiplying the market rental income from the property being assessed by the gross rental multiplier. V = D r VRM = D r , where V is the probable sale price of the valued object; D r – rental income of the property being valued; GRM – gross rent multiplier; C anal – the selling price of the analogue; PVD anal is the potential gross income of the analogue. Example. It is necessary to value a property with a high-pressure property at $15,000. The data bank contains the following information about recently sold analogues (see table)
| Sale price Sanal | |||||
BRM (averaged over analogues) = (5 + 5.43 + 4.8) : 3 = 5.
V= 15000x5= $75000
The gross rental multiplier is not adjusted for differences that exist between the appraised and comparable properties, since the calculation of the GRM is based on actual rental payments and sales prices, which take into account these differences.
4.3 Application of the cost approach
Before moving on to assessing the cost of buildings and structures using a cost approach, the appraiser must not only read the technical documentation, but also inspect the buildings and structures. This will allow him to draw up a detailed description of the assessment object, which will give the characteristics of external and internal structures and engineering systems. The cost approach includes 3 stages: First stage. Determining the value of the land plot on which the building or structures are located. Second phase. An estimate of the replacement or replacement cost of a building or structure as of the effective valuation date. Third stage. Calculation of all types of wear and tear of buildings and structures. Assessment of the replacement cost of buildings and structures. In this approach, the replacement cost or replacement cost is determined based on the following methods:
- comparative unit; element-by-element calculation (breakdown into components); index assessment.
- stage. Based on data on the construction costs of similar facilities, cost standards for construction work are developed (per 1 m², per m³ of building). As a typical structure, it is better to use a recently constructed facility for which the contract price is known. If the appraiser is unable to find a recently built comparable object, then he can use the developments of the Central Research Institute of Economics and Management, the Coinvest company and other companies, which provide specific indicators of the cost of a consumer unit of construction products for characteristic types of buildings and structures in the basic, current and forecast price levels. stage. The unit cost standard is multiplied by the total area or volume of the building being assessed. stage. Amendments are made to the characteristics of the object being assessed.
| Cost of building a basic unit | Required area | Construction cost per base unit | Corrections for the characteristics of the object being assessed | Multiplier taking into account local conditions | Full cost estimate |
Method of element-by-element calculation of the cost of buildings and structures.
This method is also called the componentization method. The appraiser carries out calculations in the following sequence:
- stage. Breaking down a building into individual elements (foundation, walls, frame, roof, etc.). stage. Calculation of the costs required to install a particular element in a building under construction at the date of assessment. To do this, the amount of direct and indirect costs required for the construction of a unit volume is determined.
- stage. Summation of element-by-element costs.
- partitioning method; lifetime method.
Splitting method.
It consists of taking into account all types of wear and tear, which include:
- removable physical wear and tear; irreparable physical wear and tear; removable functional wear; irreparable functional wear; economic (external) wear and tear.
Determination of impairment due to reversible physical depreciation
| Name of works | Cost, dollars |
| Site renovation | |
| Repair of water supply network | |
| Interior painting and finishing | |
| Removable physical impairment – total |
Determination of impairment caused by irreversible physical wear and tear of short-lived components
| Components | Total cost of reproduction | Actual or effective age | Life expectancy | Depreciation, dollars |
|
| Ventilation | |||||
| Sewerage | |||||
| Heating |
Determination of impairment caused by irreversible physical wear and tear of long-lived items
| Calculated data | Unit of measurement, dollars |
| Total cost of reproduction (without developer's profit), dollars. | |
| Removable physical impairment, dollars. | |
| Total cost of reproduction of components with a short lifespan, dollars. | |
| Total cost of reproduction of long-life components (1-2-3), dollars. | |
| Effective age of the structure, years | |
| Economic life of the structure, years | |
| Wear of long-life components ((5/6) 100), % | |
| Impairment of long-lived components ((4 7)/100), dollars. |
Determination of physical wear and tear
| building element | Replacement cost, dollars | Accumulated depreciation, dollars |
|||
| Foundation | |||||
| Power system |
|||||
| Name of the structural element | Specific gravity of a building's structural element | Wear percentage | Share of depreciation in the cost of the building |
- shortcomings that require adding elements; deficiencies requiring replacement or modernization of elements.
- related sales, when two comparable objects are compared, one of which has signs of external wear and tear, and the other does not, the difference in sales prices is interpreted as external wear; capitalization of rental losses using the gross rent multiplier.
Economic Depreciation = Loss in Rent x Gross Rent Multiplier
Lifetime calculation method. When applying this method, the following concepts are used:- Economic life– this is the time period during which an object (building) can be used to make a profit. During this period, improvements contribute to the value of the property. The economic life of a property ends when improvements made no longer contribute to its value due to general obsolescence of the property. Physical life span of an object is the period of time during which the building exists. The physical life span ends with the demolition of the building. Effective age(expertly assessed) is based on an assessment of the appearance of the object, taking into account its condition. This is the age that corresponds to his physical condition. Remaining economic life building is the period from the date of assessment until the end of the economic life of the object. Standard service life– this is the service life of buildings and structures determined by regulations.
I: VS = EV: EJ, where
I – wear; ВС – replacement cost; EV – effective age; EZh – economic life span. This formula can be written as follows:
EV: EJ = Percentage of replacement cost depreciation.
The lifespan method is used both to calculate cumulative depreciation and to calculate any one type of depreciation.
Cand. tech. sciences,
General Director of LLC "ANF-ASSESSMENT"
As is known, the gross rent multiplier (GRM) is the average statistical ratio of the market price to the potential or actual gross income of a certain type of property.
Typically, for real estate objects, the VRM is determined:
- within the framework of the income approach when using the market extraction method to determine the capitalization rate;
- within the framework of the comparative approach to calculate the market value at a known rental rate, or the value of the market rental rate at a known market value.
For this purpose, it is customary to select, for a real estate valuation similar to the object, such market offers that simultaneously contain offers for sale and offers for rent. It is assumed that such proposals are of a market nature. At the same time, the BPM value calculated on the basis of such data, as a rule, has a systematic and significant random error.
The presence of a systematic error is explained by the following. In fact, the owner, who simultaneously puts up a property for sale and for rent, is not indifferent to which option the potential buyer prefers. In the overwhelming majority of cases, the owner intends to sell the property, and offers rent so that during the period of exposure the property does not stand idle, but generates income. Realizing that when selling, the presence of a tenant is a serious burden that will lead to a reduction in the sale price, he enters into a lease agreement for a short period, or with the condition of its termination at the request of the lessor. Obviously, in this case the rental rate should be lower than the market one. Therefore, despite the fact that, in the case under consideration, the sales price tends to the market value, the BPM is systematically overestimated.
The increased random error has the following reasons. As is known, the maximum random error is equal to half the confidence interval and is (in relative values):
Where:
P - relative error (percent / 100);
t - Student distribution index;
V - coefficient of variation;
n - sample size;
S - standard deviation;
X av - sample average.
Since in a narrow segment of the market offers for the simultaneous sale and rental of real estate objects similar to the subject of assessment are extremely rare, the sample size is not large (a few offers), which entails an increase in statistical error. For example, with a satisfactory coefficient of variation of 0.1, a sample size of 3 and a significance level of 0.05, the maximum random error is 44%.
An attempt to increase the sample size by expanding the market segment leads to increased sample heterogeneity, which inevitably entails an increase in the coefficient of variation. In this case, the error of the average in the sample, as a rule, does not decrease.
Let's consider an alternative method for determining BPM. The usual equation for calculating BRM is:
(2a)
Where:
C 1 - sale price of the 1st object;
A 1 - rental rate for the 1st object, etc.
Let's bring the expression in brackets to a common denominator and multiply the numerator and denominator by the average rent (A avg). We get the following expression:
In the above expression (2b), each sales value related to the average rental rate is multiplied by a coefficient representing the ratio: in the numerator, the product of rental rates, in which the rental rate corresponding to the term is replaced by the average rental rate, in the denominator, the product of all rental rates. Denoting these coefficients as P 1, P 2 ... P n and averaging them (P avg), we obtain the following approximate calculated dependence:
(3)
In this form, dependence (3) allows you to determine the VRM based on unrelated data on sales prices and rental rates, that is, relating to different real estate objects within the same market segment.
It is obvious that the degree of approximation of dependence (3) to the original “exact” dependence (2b) is determined by the value of the averaged coefficient and the range of the sample values of the sales price and rent.
Let's try to estimate the magnitude of the error in dependence (3) compared to dependence (2b).
Let's consider two samples, in each of which the values C 1, C 2 ... C n and A 1, A 2 ... A n are not equal to each other, but their ratios are equal to the same value
(C 1 / A 1 = C 2 / A 2 =...). Obviously, in this case the condition must be met: Рср = 1. If we take the value of the ratio of the largest and smallest values as a characteristic of the sample range, then for the case under consideration we have: C max / C min = A max / A min.
Possible averaging methods can be: arithmetic mean, geometric mean, harmonic mean. The analysis showed that the arithmetic mean and geometric mean, when used as an average value, give a systematic error in the direction of overestimating the result. For example, with C max / C min = A max / A min = 2.0, with a sample of n = 10: for the arithmetic mean - P avg = 1.049, for the geometric mean - P avg = 1.024. For the harmonic mean - always P av = 1.000, regardless of the sample range and the law of change in the values of A in the sample. This effect can be proven strictly mathematically. Therefore, in further research it was assumed that the harmonic mean is used for averaging, that is, always P av = 1.
Since expressions (2a) and (2b) give identical results, further reference is given simply to dependence (2).
Let's consider two samples of the same volume of quantities C 1, C 2 ... C n and A 1, A 2 ... A n, the law of change of which is arbitrary, but the equality of the ratio C max / C min = A max / A min is preserved.
The study showed that if you arrange the sample elements in ascending (descending) order and calculate the BPM value for each of the resulting pairs of values C and A, then the calculation results from dependencies (2) and (3) will coincide. The greatest deviation of the results obtained from dependencies (2) and (3) is observed if the values change “out of phase” (small values of C correspond to large values of A and vice versa), and the change occurs stepwise in the middle of the sample. Moreover, as it turned out, the result does not depend on the sample size.
By constructing a graph for two borderline cases, it is possible to obtain the region of uncertainty in the BPM values, which characterizes the error in the transition from dependence (2) to dependence (3). This area is shifted downward from the results obtained from dependence (2).
The calculation results for the case C max / C min = A max / A min are shown in Fig. 1.
Rice. 1. Dependence of the ratio of the results of calculating the VRM according to dependencies (3) and (2) on C max / C min, provided that
C max / C min = A max / A min
By drawing the middle line in the resulting area, you can determine an adjustment that will allow you to combine this middle line with the values obtained from dependence (2). In this case, the error when using dependence (3) will be symmetrical relative to the exact result. For example, with C max / C min = A max / A min = 2.0, the value of the correction factor will be K = 1.111, and the error will be 10%. Considering that the value P av = 1 is always present, dependence (3) can be presented in the following calculated form:
Where:
K is an adjustment coefficient that depends on the parameters of samples of sales prices and rental rates.
Since in practice it is not always possible to ensure the fulfillment of the equality C max / C min = A max / A min, variational calculations were carried out, which made it possible to obtain the values of correction coefficients, depending on the parameters of the original samples. The calculation results are given in table. 1. In table. Table 2 shows the results of assessing systematic errors caused by the uncertainty of the law of changes in sales prices and rental rates in the samples. At the same time, it is characteristic that in the general case, the sample sizes of values C and A may not coincide.
Table 1
The value of the correction factor depending on the characteristics of the samples
| Ratio C max / C min | Ratio A max / A min | ||||||
| 1,00 | 1,25 | 1,50 | 2,00 | 2,50 | 3,00 | 4,00 | |
| 1,00 | 1,000 | 1,006 | 1,029 | 1,085 | 1,153 | 1,220 | 1,358 |
| 1,25 | 1,000 | 1,012 | 1,036 | 1,095 | 1,165 | 1,232 | 1,370 |
| 1,50 | 1,000 | 1,015 | 1,040 | 1,103 | 1,172 | 1,240 | 1,376 |
| 2,00 | 1,000 | 1,019 | 1,047 | 1,111 | 1,181 | 1,247 | 1,377 |
| 2,50 | 1,000 | 1,021 | 1,050 | 1,115 | 1,183 | 1,249 | 1,374 |
| 3,00 | 1,000 | 1,024 | 1,053 | 1,119 | 1,186 | 1,250 | 1,370 |
| 4,00 | 1,000 | 1,026 | 1,057 | 1,122 | 1,188 | 1,248 | 1,360 |
Table 2
Systematic error caused by the uncertainty of the laws of change in sales prices and rental rates in samples, depending on the characteristics of the samples
| Ratio C max / C min | Ratio A max / A min | ||||||
| 1,00 | 1,25 | 1,50 | 2,00 | 2,50 | 3,00 | 4,00 | |
| 1,00 | 0,0% | 0,6% | 1,2% | 3,5% | 5,9% | 8,5% | 13,1% |
| 1,25 | 0,0% | 1,2% | 2,7% | 6,1% | 9,3% | 12,4% | 17,8% |
| 1,50 | 0,0% | 1,9% | 4,0% | 8,2% | 11,8% | 15,4% | 21,4% |
| 2,00 | 0,0% | 3,0% | 5,8% | 11,1% | 15,7% | 19,8% | 26,6% |
| 2,50 | 0,0% | 3,7% | 7,1% | 13,2% | 18,3% | 22,8% | 30,1% |
| 3,00 | 0,0% | 4,2% | 8,1% | 14,7% | 20,3% | 25,0% | 32,6% |
| 4,00 | 0,0% | 5,0% | 9,4% | 16,8% | 22,9% | 28,0% | 36,0% |
The magnitude of the maximum random error when calculating the BRM using dependence (3) is determined by the usual dependence (1). In this case, the coefficient of variation is calculated as follows:
;
Where:
V VRM - coefficient of variation of the calculated value of VRM;
V С - coefficient of variation of a sample of sales prices (C);
V 1/A is the coefficient of variation of the sample of inverse values of rental rates (1/A).
Since the magnitudes of systematic and random errors are mutually independent, the total error is defined as:
Where:
P sums - the total error of the calculated value of the BRM;
P syst - systematic error;
P case - random error.
Conclusions:
1. A justification is given for the admissibility of using the method of calculating VRM based on unrelated average market values of sales prices and rental rates determined within the relevant market segment, which allows to significantly expand the composition of potential analogue objects.
2. It is shown that the considered method for calculating VRM allows us to move to a controlled systematic error in the calculation, in contrast to calculations based on sales prices and rental rates related to single objects.
3. The potential possibility of using larger samples as initial data in calculations makes it possible to reduce the random error to acceptable values.
Literature
- dictionary.finam.ru/dictionaryp
- Esipov V. E., Makhovikova G. A, Terekhova V. V. Business assessment. 2nd edition. St. Petersburg, PETER, 2006p
- Theory of statistics. Textbook. Ed. G. L. Gromyko. 2nd edition. M., INFRA-M, 2005p
- Ryvkin A. A. et al. Handbook of mathematics. M., Higher School, 1975p
Real estate valuation in Russia has existed for quite a long time and its methodology, developed by Western scientists, has been successfully tested in Russian economic conditions. One of the weak elements in the real estate valuation system is the information support of this process. So, if when assessing residential real estate (apartments) practically no problems arise with this, since a large number of periodicals and specialized publications are published, which constantly publish the results of analyzes of the residential real estate market, the current situation and trends in its development, then when assessing For non-residential real estate, the situation can be said to be somewhat different: there is a very limited amount of analytical information in the public domain, a relatively small number of comparable objects, especially in locations where the market is underdeveloped, which makes it difficult to carry out relevant analyses, calculations, etc. This, in turn, affects the possibility of using certain approaches and methods existing in the real estate valuation system. One of these methods, in our opinion, is the gross rent method (gross rent multiplier method), the results of which in valuation practice are relatively accurate in comparison with other methods for assessing real estate. The application of the principles for determining the gross rental multiplier correlates with the principles for calculating the capitalization rate of a real estate property.
In this publication, we conducted a brief analysis of these definitions, their relationship with each other, as well as their application in practice. We studied analytical information on segments of the commercial real estate market in Novosibirsk in the retrospective period and as of the date of the study.
Basic definitions
Capitalization rate(capitalization ratio) - an indicator that describes the ratio of the market value of an asset to net income for the year. In property valuation, this indicator is calculated as follows: net profit per year / property value. The capitalization rate shows the investor the percentage of income that he will receive by purchasing a particular asset.
Gross rent multiplier (GRM)– this is an indicator reflecting the ratio of the sales price and the gross income of the property. The gross rental multiplier is used for objects for which either potential (PVG) or actual gross income (AGI) can be reliably assessed.
The gross rental multiplier method is based on the assumption that there is a direct relationship between the market value of a property and the potential rental income that can be obtained by leasing this property. Therefore, it is used to estimate the value of a property if the rental rate at which the property can be leased is known as the initial data. The multiplier also allows you to solve the inverse problem: Determine the required rental rate based on the known value of the property. In terms of valuation technique, this method is close to the direct capitalization method. However, it has its own characteristics. The gross rental multiplier is not an individual characteristic of a particular property. It does not take into account the characteristics of the property being assessed, namely, the remaining service life, the level of operating expenses specific to this property, market expectations regarding the growth of rental rates, the financial terms of the transaction, etc. This multiplier characterizes the average ratio between rental revenue rent and market value of the property, characteristic of a given class of objects or, more precisely, for a given market segment. Therefore, the gross rental multiplier can only be used as a rough method for valuing a property, close in meaning to mass valuation methods. This is the fundamental difference between this multiplier and the capitalization ratio, which can differ significantly for two similar objects if these objects differ, for example, in their remaining service life. It is worth noting that, unlike the gross rental payment multiplier, the capitalization ratio has a clear economic meaning. It characterizes the final profitability and method of capital recovery characteristic of a particular property. Therefore, it can be calculated based on an analysis of the profitability of alternative investment options, taking into account the expected growth or decline in the value of the property being assessed for the forecast period.
Today, there are various formulas for calculating the gross rental multiplier and capitalization rates. When using different formulas, the range of rates for a known BPM may differ.
Common formulas for calculating BRM and capitalization rates
Let's consider the first formula, taken from the textbook by Rutgaiser V.M. "Evaluation of the market value of real estate." For the calculation, a list of real estate objects comparable to the valued object, recently sold and leased, is generated. Since in Russian conditions such data is not freely available to appraisers, then, quite reliably, you can use the data from the proposals. Comparison of analogue objects with the object being valued is carried out, as a rule, according to their functional purpose, since other factors (finishing, location, etc.) are already taken into account in the sales price and rent. After compiling a list of comparable objects, the gross rental multiplier (GRM) is calculated using the formula:
A.V. Dotsenko, in his scientific article “Calculation of capitalization discount rates when valuing real estate in times of crisis,” believes that when calculating the value of VRM, average market values of rent and cost for the corresponding segment of the real estate market can be used. The calculated dependence for determining the BRM has the form:
Using the direct method of determining the multiplier L.A. Leifer in the article “Determination of the gross rent multiplier based on “historical” data,” GRM is calculated using the formula:
The direct method of determination can be used in the case when, for the class of objects of interest for valuation, it is possible to select a sufficient number of objects for which there are simultaneously data on proposals for their sale and rental. Such data can usually be found for real estate properties belonging to a developed segment of the market, for example, office or retail premises in large cities, where the sales and rental markets are quite developed ( It is known from mathematical statistics that such an estimate is the best in the class of linear unbiased estimates).
Also Leifer L.A. proposed his own methodology for calculating the capitalization rate, based on the value of the GRM. According to the proposed methodology, the calculation is made on the basis of a variation series (ordered samples). The first sample is formed from sales prices, the second from rental rates. Then the samples are ranked and pairs are formed to calculate the BPM. The formation of pairs is based on the assumption that objects with similar consumer properties occupy approximately the same places, as in the ordering of rental rates. Based on this assumption, we can assume that the resulting pairs of sales price and rental rate values refer to the same or at least similar objects in terms of basic consumer characteristics.
But as a rule, to calculate the capitalization rate, a basic formula is used (textbook by N.E. Simionova, R.Yu. Simionov “Business Valuation: Theory and Practice”), it looks like this:
Using the transformation of formulas (1) and (4), you can derive the formula for the dependence of BRM and SC, which will look like this::
,
Also, by transformation, formula (5) can look like this:
Table of the relationship between VRM and SK for the commercial real estate market in Novosibirsk according to data for 2016.
Based on Analytical information “Monitoring. Offers on the commercial real estate market of Novosibirsk" RID Analytics, compiled at the end of 2016 and using the article by Zhivaev M.V. "Results of expert assessments of the values of significant parameters used in valuation activities" for the 2nd quarter of 2016 in the part "Value of operating expenses in percent from the actual gross income (DVI)”, a summary table was compiled of the relationship between the range of SC and VRM depending on each other and on other factors. Calculations were carried out using formulas (1) and (6):
Analysis of the capitalization rate of retail real estate in Novosibirsk according to open public information for various periods from 2009 to 2016.
As a result of conducting research on this topic, we studied the available analytical information and provided the ranges of capitalization rates for the retail real estate segment in Novosibirsk in a retrospective period.
General Director, category I appraiser Evgenia Sergeevna Arsenchuk
Gross rent multiplier (GRM)– an indicator reflecting the ratio of the sales price and gross income of a real estate property (potential or actual), which have similar real estate objects. It is an aggregated indicator and is used as a multiplier to the income of the assessed object. BPM is not adjusted for differences in object characteristics.
Where R i- Selling price i-th similar object;
I i- gross income i-th similar object;
n– number of analogues used (3-5 objects).
The market value of the property being valued is determined by the formula:
(27)
where V is the market value of the property;
I – gross income from the property being valued.
Problem 13: Determine the market value of a one-room apartment if the sales prices and rent levels for three similar apartments in a given city district are known. Market data is presented in Table 7. The assessed one-room apartment is rented for 7.7 thousand rubles. per month.
Table 7 – Calculation of gross rent multiplier
|
Analogue objects |
Market price, thousand rubles. |
Rent per month, thousand rubles. |
Estimated VRM |
|
Apartment 1 | |||
|
Apartment 2 | |||
|
Flat 3 | |||
|
BRM average |
The market value of the assessed one-room apartment is:
3.3 Cost-based approach to real estate valuation
The cost approach is based on determining the costs that are necessary to recreate (replace) the property being valued, taking into account accumulated depreciation. The cost calculated using the cost approach includes the sum of the residual value of the building and the land plot.
(28)
V– the cost of the property;
V L– cost of the land plot;
V restore– cost of restoration (replacement) of the building;
D- accumulated wear and tear of the building being assessed.
General situations for using the method:
special purpose real estate valuation
feasibility analysis for new construction
determining the best, most effective use option
determining the value of real estate in passive markets
when checking assessment results carried out by other assessment methods.
Mandatory situations for using the method:
purposes of property taxation
seizure if necessary to determine the value of buildings, land
income tax purposes
when insuring real estate.
Over time, the cost of structures, buildings and structures decreases for a number of reasons:
wear and tear of the structure during operation;
adverse environmental influences;
changes in construction technology;
influence of external factors.
Depreciation is the loss of the usefulness of a piece of real estate, and therefore its value. Wear happens:
Physical/decrease in cost due to loss of specified consumer properties over time/
Functional/decrease in property value due to non-compliance with modern architectural, aesthetic, planning solutions, comfort/
External/ obsolescence of value due to changes in the external environment; factors do not directly affect the building itself/
Physical and functional wear and tear can be removable or irreparable.
Methods for determining the wear and tear of a building:
Method of breakdown by components.
It consists in separately considering the wear and tear of building structures, taking into account their specific weight in the total cost of the object; taking into account the specific weights of structural elements and their wear values, the total physical wear and tear is determined.
Effective age method.
Based on an examination of the buildings of the property being assessed. It states that the effective age ( EV) refers to the typical economic life span ( SJE), as accumulated wear ( AND) to replacement cost ( Sun).
(29)
A way to compare sales.
It consists of identifying a market assessment of the accumulated depreciation of a building by comparing its replacement cost with current sales prices of similar objects. Subsequence:
Selection of recent sales of properties similar to the one being valued.
Determination of the replacement cost of the building.
Determining the current market value of the building.
Determination of the average value of accumulated wear by difference (V new – V current ) .
Economic life span (ELL)- the period during which the building contributes to the total value of the property is used to increase profits.
Effective age (EA)- time by which the life expectancy of a building is estimated, based on its physical condition, equipment, design, and economic factors.
Problem 14: The replacement cost of a building built 45 years ago is determined to be 14,725 thousand rubles. According to the standard project passport, the economic life of the building is 110 years. The effective age of the building is equal to the actual age. The market value of the land plot using the sales comparison method is estimated at 1230 thousand rubles. Determine the value of the property.
1 The amount of accumulated wear is determined.
2 The total cost of the property is calculated
Problem 15: Determine the market value of the property if the following initial data are given:
land area 2,917 m2
cadastral value of land 248 rub./m2
useful area of the building 2,000 m2
the cost of construction of the building according to the estimate is 31,262 thousand rubles.
indirect costs are 20% of the construction cost
annual rental loss for the premises is 59 rubles/m2
the gross rental multiplier for a similar property is 4.2.
The following types of restoration work must be carried out in the building being assessed:
roof replacement 150 thousand rubles.
interior decoration 430 thousand rubles.
dismantling and modernization of the heating system 195 thousand rubles.
1. The cost of the land plot is determined (V L)
where S L is the area of the land plot
C K – cadastral value of land of the corresponding type of functional use
2. The full replacement cost of the building is calculated
3. The total (total) accumulated wear (D) is calculated. It is established based on the cost of restoration and repair work.
To physical wear and tear ( D physical) include the costs of replacing the roof and interior finishing.
D physical = 150+430=580thousand roubles.
To the functional – modernization of the heating system.
D func. = 195 thousand roubles.
External wear and tear consists of reduced rent payments. The cost of economic depreciation is determined by capitalizing rental losses or using a gross rental multiplier.
D physical = 2000×59×4.2=495.6 thousand roubles.
4 Find the cost of the property (form. 28)
4. Determining the best and most effective option for using real estate.
1. Location.
2. Market demand.
3. Availability of long-term land lease agreements.
4. Resource quality of the site.
5. Investment attractiveness.
Best and best use analysis is carried out in two cases:
1. Undeveloped area.
2. Building plot (existing improvements).
Remainder for land
Income related to land is defined as the remainder after subtracting from the total income generated by the object, which consists of satisfying the remaining factors of production.
V o = V L + V B (30)
Where V o- total cost
V L– cost of land
V B– cost of buildings and structures
V L = (NOI – V B × R B)/ R L (31)
Where NOI– net operating income
R L– capitalization rate for land
V B × R B– income related to buildings and structures
The method is used for objects with new buildings.
Remaining for buildings and structures
Used to estimate the cost of improvements, provided that the cost is determined with high accuracy. The method is used for a property with outdated and very dilapidated buildings.
V B = (NOI – V L × R L )/ R B (32)
V L × R L – income related to land
4.1 Vacant land
The analysis is carried out in 3 stages:
1. Use options (development strategies) are selected.
2. The cost of new construction is determined for each of the selected options. Factors such as the resource quality of the site and technological feasibility are taken into account.
3. Determine the financial feasibility of the analyzed development strategies. To do this, a forecast report on income and expenses is compiled, net operating income is determined, etc.
Problem 16: Three possible strategies for developing the site have been identified: residential building, office building, shopping center. The cost of development is respectively 45.8 million rubles, 54.6 million rubles, 70.0 million rubles. The expected return on investment is 12%. The service life of objects is determined at 90, 50, 50 years. The comparison of development strategies is made based on the residual method for land. The capitalization rate for land is 11%.
1. The capitalization rate for buildings is determined (using the Ring method)
R railway station = 12%+100%/90 = 13.1%
R office building = 12%+100%/50 = 14.0%
R t.c. = 12%+100%/50 = 14.0%
2. Net operating income attributable to buildings is calculated
NOI railway = 45.8 × 0.131 = 6.0 million rubles.
NOI office building =54.6×0.14 = 7.644 million rubles.
NOI t.c. = 70.0×0.14 = 9.8 million rubles.
3. Find the net operating income related to land plots, which is capitalized into the current value of the land
Table 8 – Analysis of the best and most efficient use of land, thousand rubles.
|
Indicators |
Residential building |
Office building |
Shopping mall |
|
|
Annual Gross Income | ||||
|
Adjustments for underutilization and losses in collection of payments (loss of rent for space) | ||||
|
Other income (beauty salon, bar, etc.) | ||||
|
Actual Gross Income | ||||
|
Operating expenses (facility operation) | ||||
|
Reserve for replacement of short-lived elements (communications, plumbing, etc.) | ||||
|
Net operating income (total), NOI ABOUT | ||||
|
Income attributable to buildings NOI IN | ||||
|
Net operating income from land, NOI L | ||||
|
Land cost, V L |
Conclusion: The best option for using the land is to develop a shopping center, because the value of land is higher and the income from land is greater.
