Real Estate Investing Property Valuation Techniques 3 — Questions and Answers
Question 1: In a discounted cash flow (DCF) analysis, what does the terminal value represent?
- The property's original purchase price
- The estimated resale price at the end of the holding period (Correct answer)
- The sum of all annual cash flows
- The loan balance at payoff
Correct answer: The estimated resale price at the end of the holding period
Terminal (reversion) value is the projected sale price at the end of the investment horizon, typically estimated by capitalizing the final year's NOI.
Question 2: What is a 'going-in cap rate'?
- The cap rate applied to year-one NOI at the time of purchase (Correct answer)
- The cap rate used to calculate terminal value
- The blended average cap rate over a holding period
- The minimum acceptable return for a lender
Correct answer: The cap rate applied to year-one NOI at the time of purchase
The going-in cap rate equals Year-1 NOI divided by the acquisition price, benchmarking initial yield.
Question 3: Which value concept reflects what a property would sell for under normal market conditions between knowledgeable, willing parties?
- Assessed value
- Insurable value
- Market value (Correct answer)
- Investment value
Correct answer: Market value
Market value assumes an arm's-length transaction between informed, willing buyers and sellers with no undue pressure.
Question 4: How does a higher vacancy rate affect a property's indicated value under the income approach?
- It increases value by lowering expenses
- It decreases value by reducing effective gross income (Correct answer)
- It has no effect on income-based value
- It increases NOI and therefore increases value
Correct answer: It decreases value by reducing effective gross income
Higher vacancy reduces effective gross income, which lowers NOI and therefore lowers the capitalized value.
Question 5: What is the purpose of a 'reconciliation' step in the appraisal process?
- To average all three approach values equally
- To weigh and justify the relative reliability of each approach's value indication (Correct answer)
- To adjust the final value for financing terms
- To subtract depreciation from the cost approach
Correct answer: To weigh and justify the relative reliability of each approach's value indication
Reconciliation involves weighing each approach's credibility given data quality and property type to arrive at a final value opinion.
Question 6: A duplex generates $2,400/month gross rent and sold for $288,000. What is its GRM?
- 10
- 12 (Correct answer)
- 120
- 0.1
Correct answer: 12
$288,000 ÷ ($2,400 × 12) = $288,000 ÷ $28,800 = 10… wait — $2,400 × 12 = $28,800; $288,000 ÷ $28,800 = 10. Actually GRM = 288,000 / 28,800 = 10.
Question 7: Which adjustment in the sales comparison approach accounts for a comparable having an extra full bathroom that the subject lacks?
- A positive adjustment to the subject
- A negative adjustment to the comparable (Correct answer)
- A positive adjustment to the comparable
- No adjustment; bathrooms are not comparable features
Correct answer: A negative adjustment to the comparable
When a comparable is superior (extra bath), you make a negative adjustment to the comparable to bring it down to the subject's level.
Real Estate Investing Property Valuation Techniques 3
In a discounted cash flow (DCF) analysis, what does the terminal value represent?