Property Valuation Methods Flashcards

In the discounted cash flow (DCF) method, the discount rate used should reflect:

Answer: The investor's required rate of return including risk

The discount rate in DCF represents the investor's required total return, incorporating risk, opportunity cost, and market expectations.

When extracting a capitalization rate from comparable sales, the appraiser divides:

Answer: Net operating income by sale price

Market-extracted cap rates are derived by dividing a comparable property's stabilized NOI by its confirmed sale price.

Functional obsolescence caused by a feature that was once desirable but is now outdated is called:

Answer: Superadequacy

A superadequacy is an excess feature that no longer adds commensurate value, representing a form of functional obsolescence.

In the income approach, potential gross income (PGI) is best defined as:

Answer: Maximum income a property could generate if fully leased at market rates

PGI represents the total income a property would generate at 100% occupancy with all units leased at market rents.

Under the cost approach, the land value must be estimated separately because:

Answer: Land is not depreciable and must be valued as if vacant

Land is considered non-depreciating and must be valued independently, typically via the sales comparison method applied to vacant land sales.

The term 'effective gross income' (EGI) in an income property pro forma is calculated as:

Answer: PGI minus vacancy and collection loss plus other income

EGI equals potential gross income reduced by vacancy and collection losses, plus ancillary income such as parking or laundry fees.

Which approach to value is most heavily relied upon when appraising a special-purpose property like a church or school that rarely sells?

Answer: Cost approach

Special-purpose properties lack sufficient comparable sales and income data, making the cost approach the most applicable methodology.