California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
An appraiser is valuing a property using the income capitalization approach. The property's Net Operating Income (NOI) is $75,000, and the current market capitalization rate is 6%. However, the appraiser notes that recent comparable sales indicate a higher cap rate of 6.5% for properties requiring minor deferred maintenance, which applies to the subject. What is the estimated value of the property, considering the deferred maintenance?
- A$1,282,051
- B$1,300,000
- C$1,153,846
- D$1,250,000
Show answer & explanationAnswer & explanation
Correct answer: C. $1,153,846
The appraiser must use the capitalization rate that most accurately reflects the subject property's condition, which is 6.5% due to deferred maintenance. Value = NOI / Cap Rate. $75,000 / 0.065 = $1,153,846.15, rounded to $1,153,846.
Why the other options are wrong
- A. Incorrect, likely a miscalculation.
- B. Incorrect, likely a miscalculation.
- D. Incorrect, this would be if the 6% cap rate was used ($75,000 / 0.06 = $1,250,000).
Capitalization Rate (Cap Rate) Selection
The rate of return used to convert Net Operating Income (NOI) into an estimated property value, which must accurately reflect the property's risk and condition.
- Derived from comparable sales data
- Higher risk/deferred maintenance implies higher cap rate
- Lower risk/better condition implies lower cap rate
Memory trick: Match Cap Rate to Property's True Risk