Procedures Key Terms Flashcards
PGI
– The income that could be produced by a property in an ideal situation, with no
vacancy or collection losses.
Potential Gross Income
i.e., ALL the income produced from a property.
EGI
– Potential gross income, less vacancy and collection losses.
Effective Gross Income
EGI = PGI less
Vacancy & Collection loss only.
– Day-to-day costs of running a building, such as repairs and maintenance, but not including
debt service or depreciation.
Operating Expenses
NOI
– Income after expenses.
Net Operating Income
NOI = EGI less operating expenses.
GRM
- A number derived from comparable rental property in an area, which is then used in
an income method for indicating a value conclusion.
Gross Rent Multiplier
GRM is determined by dividing the sold price of the comparable by the gross market rent.
Age Life Method
– Estimates depreciation as a ratio of the effective age of the improvements to the total economic life.
Effective age divided by the total economic life = depreciation percentage.
Adjustment application
– Adjustments are only made to the comparable sale price and are made in sequence.
When the comparable is superior, subtract –
When the comparable is inferior, add.
Sequence of Adjustments:
- Property rights conveyed
- Financing terms
- Conditions of sale
- Market conditions
- Location
- Physical characteristics
(the % of 5 and 6 can be combined into one sum before subtracting the sum from adjusted price)
– A method for determining the cost of a building that uses the cost of recently built
comparable buildings as a basis for estimating the cost of replacing the subject property.
Comparative Unit Method
IRV (Income, Rate, and Value)
– The formula to determine real estate value can always be found with IRV.
The IRV formula is:
Net Operating Income/Rate = Value
By rearranging the IRV formula, you can solve for any one variable if you have the other two.
For Example: Net Operating Income/Capitalization Rate = Value
Income/Value = Rate
Income/Rate = Value
- Process of converting property income into a value estimate.
Capitalization
– Expressed as a percentage; net operating income divided by effective gross
income.
Net Income Ratio (NIR)
– Used to interpret a property’s single year net operating income to the property’s value
using direct capitalization (symbolized by RO).
Overall Capitalization Rate
– An appraisal procedure that is used in the income analysis of a property. Cash flows are
converted to present values using a rate of return that would be required to attract an investor.
Discounted Cash Flow
– Analyzing the conclusions within each approach that was developed; analyzing the values derived from the different appraisal approaches to arrive at a final opinion of value.
Reconciliation
