Ndfl / 15.09.2021

Gross rental multiplier. Gross rental multiplier

3. Real estate appraisal

3.5. Approaches to real estate appraisal.

3.5.1. Comparative (market) approach

Comparative approach to appraisal is a set of valuation methods based on comparing the appraisal object with its counterparts, in respect of which there is information about the prices of transactions with them.

Conditions for applying the comparative approach:
1. The object must not be unique.
2. The information must be comprehensive, including the terms of transactions.
3. Factors affecting the value of compared analogs of the appraised real estate must be comparable.

The comparative approach is based on the principles:
- substitution;
- balance;
- supply and demand.

Steps of the comparative approach:

Stage 1

Market research - an analysis of the state and trends of the market is carried out, and especially of the segment to which the evaluated object belongs; identifies real estate objects that are most comparable to the appraised one, sold relatively recently.

Stage 2

Collecting and checking the reliability of information about the proposed for sale or recently sold analogs of the subject of valuation; comparison of analog objects with the evaluated object.

Stage 3

Adjustment of the sales prices of the selected analogues in accordance with the differences from the valuation object.

Stage 4

Establishing the value of the appraisal object by agreeing the adjusted prices of analogous objects.

Comparable objects must belong to the same segment and transactions with them should be carried out on conditions typical for this segment:

Exposure period. Exposure time - the time that the object is on the market;

The independence of the subjects of the transaction. Independence means that transactions are not concluded at market prices if the seller and the buyer:
· Are in a family relationship;
· Are representatives of the holding and an independent subsidiary;
· Have a different interdependence and mutual interest;
· Transactions are carried out with objects burdened with a pledge or other obligations;
· Are engaged in the sale of real estate objects of deceased persons, etc .;
- investment motivation, which is determined by:
· Similar motives of investors;
· Similar best and most efficient use of facilities;
· The degree of deterioration of the building.

The main criteria for the selection of analogue objects:
1. Ownership of real estate.
Ownership adjustment is the difference between market rent and contractual rent, as full ownership is determined at market rent and current funding available.
2. Terms of financing the transaction. In case of atypical financing conditions of the transaction, a thorough analysis is required, as a result of which an amendment is made.
3. Terms of Sale and Time of Sale.
4. Location.
5. Physical characteristics.

To determine the final value of the property being appraised, an adjustment to comparable sales is required. The calculation and adjustments are made on the basis of a logical analysis of previous calculations, taking into account the significance of each indicator. The most important is the accurate determination of the correction factors (see Fig. 3.2).

Rice. 3.2. Types of adjustments

Percentage adjustments are introduced by multiplying the selling price of the analogue object or its comparison unit by a coefficient reflecting the degree of differences in the characteristics of the analogue object and the evaluated object. If the object being evaluated is better than a comparable analogue, then a raising coefficient is added to the price of the latter, if it is worse - a decreasing one.

Cost adjustments:

a) absolute corrections, introduced to the unit of comparison, change the price of the sold analogue object by a certain amount, in which the difference in the characteristics of the analogue object and the evaluated object is estimated. A positive correction is made if the evaluated object is better than a comparable analogue, negative if it is worse;

b) monetary adjustments added to the price of the sold analogue object as a whole, change it by a certain amount, in which the differences in characteristics are estimated.

Cumulative Percentage Adjustments are determined by multiplying all individual percentage adjustments.

Amendment in the form general grouping it is usually used in the developed real estate market, where there are a large number of sales. The cumulative adjustment is made within the selected group of comparable objects.

Sequence of amendments:
1. Amendment to Funding Terms.
2. Amendment for special conditions of sale.
3. Adjustment for the time of sale.
4. Correction for location.
5. Correction for physical characteristics.

Benefits of the comparative approach:
1. The final cost reflects the views of typical sellers and buyers.
2. Sales prices reflect changes in financial conditions and inflation.
3. Statically grounded.
4. Corrections are made for differences between compared objects.
5. It is quite easy to use and gives reliable results.

Disadvantages of the comparative approach:
1. Differences in sales.
2. Difficulty collecting information about practical sales prices.
3. Problems in collecting information on specific terms of the transaction.
4. Dependence on market activity.
5. Dependence on market stability.
6. Difficulty reconciling data on significantly different sales.

3.5.1.1. Paired Selling Method

One of the ways to determine the magnitude of the correction for any characteristic is by analyzing pairwise sales. It consists in comparing and analyzing several pairs of comparable sales. In this case, paired sales are sales of two real estate objects that are almost identical, with the exception of one characteristic that an expert appraiser must evaluate in order to use it as an adjustment to the actual price of a comparable property.

For example

The following information on market sales is known:



Area, m2


Selling price, $

Define:

1. Correction for differences in area.

2. Adjustment for the presence of a garden.

3. Adjustment for the presence of a garage.

Solution


	Assessed
Area, m2
Adjustment

Adjustment

Adjustment
Selling price, $	*29000*
Cumulative adjustment
Adjusted price

Expert amendment techniques are used when monetary adjustments cannot be made.

Let the cost of the evaluated object = X;

The cost of the sold object = 1.0 (100%).

if the object is 15% better than the analogue, then the price of the analogue should increase by 15%

X = (1.0 + 0.15) * 1 = 1.15.

if the object is worse than the analogue by 15%, then the price of the analogue should decrease by 15%

X = (1.0 - 0.15) * 1 = 0.85.

if the analogue is better than the evaluated object by 15%, then the price of the analogue should decrease

1.0 = (1.0 + 0.15) * X; .

if the analogue is worse than the evaluated object by 15%, then the price of the analogue should increase

1.0 = (1.0 - 0.15) * X; .

3.5.1.2. Gross rental multiplier method

Gross Rent Multiplier (GRM) Is the ratio of the selling price to either potential gross income or actual income.

To apply this method, you must:

1) evaluate the market gross income generated by the object;

2) determine the ratio of gross income from the evaluated object to the sales price for comparable sales of analogues;

3) multiply the gross income from the assessed object by the average BPM value by analogs.

The probable selling price is calculated using the formula

Example

BPM calculation

	Selling price, cu
Assessment object	1500005,08 =762169*	5+5,43+4,81 = 5,08
		800000/160000 = 5,00
		950000/175000 = 5,43
		650000/135000 = 4,81

The role of BPM can be played by the total capitalization ratio (OCC).

JCC Is the ratio of the net operating income to the selling price.

In this case

;

Example

Calculation of OCC

	Selling price, cu
Assessment object	*375000*		0,13
			incomparable

		35,000 (for the past year)	incomparable

Table 3.3 is an example of using the method of paired sales when evaluating an apartment.

Table 3.3

Calculation of the cost of an apartment by the method of paired sales

Object characteristics	Assessment object	Mapping objects
		Mapping objects

Location
Adjustment
Number of storeys of the apartment
Adjustment
Object state
Adjustment
Total area, m 2
Adjustment
Living area, m 2
Adjustment
Kitchen area, m 2
Adjustment

Adjustment
Apartment price, $
Total correction
Adjusted apartment price, $

The number of similar offers in the residential real estate segment allows all market participants to determine the real price of an apartment based on a simple comparison. In the commercial sector, this challenge is compounded by the lack of identical analysis facilities.

The solution to the problem is the use of the gross rent method, which allows you to determine the value of an object for any purpose. In evaluating complex, commercial real estate, the MVR is called the best of the proposed methods; it allows determining the real cost of the premises with a minimum error.

The relationship between the indicators used for calculations is reflected in the gross rental multiplier (GRM). The main feature of the indicator used is that the assessment takes place according to the purpose and function of the building. An analysis of the location, decoration and operating costs associated with the maintenance of the structure is excluded from these calculations.

Method steps

Determination of the gross rent indicator is divided into several stages. All work can be conditionally divided into the following steps:

Selection of premises for determining the gross rental multiplier.
Direct calculation of GRM. At this stage, the value of each selected property is divided by the estimated rental income. The main task of the realtor is to accurately determine the total rent for the year. Calculation formula: GRM = PV / PGR, where PV is the cost of the object, PGR is the potential cost of rent.
The data obtained when calculating the multiplier are summed up and divided by the number of analyzed real estate objects. The result of the calculation will be the indicator of the gross rent method.
Determining the price of real estate. At this stage, you will need to multiply the potential or actual rental income by the coefficient obtained when calculating the MVR. If the rent cannot be calculated, the appraiser can use the market average.

Practical applicability of the method

The use of the gross rent method, despite the convenience with limited access to information on similar objects, is not always justified. The negative factors when calculating the MVR include:

the use of this method of assessment, in full, is justified only under the condition of an active real estate market, in the event of its decline, information for analysis will not be enough;
the calculations do not assess the risks of objects and the return on capital spent;
no adjustments for landscaping, location and operating costs for maintaining the facility.

If the shortcomings do not have a significant effect on the total value, then the gross rent method becomes the most accurate way to determine the actual market price of the acquired or sold real estate object.

Problem 1

1.Division method incl. includes 3 types of wear:

Physical deterioration

Functional wear

External wear

Physical deterioration - the object's loss of its consumer qualities due to exploitation or natural (natural) factors.

Functional wear reflects a decrease in the value of the object due to its inconsistency with modern market requirements for architectural, aesthetic, space-planning, structural 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, legal and financial conditions, etc.

Physical and functional wear is divided into removable and irreparable.

Eliminate wear - this type of wear, the cost of elimination of which is less than the added value of the object

Irreparable wear and tear - the one in which either the elimination of wear is impossible, or the cost of its elimination is higher than the added value, it is taken into account in the amount of wear.

1A multi-storey building without an elevator - function.

2) The roof is leaking in the house - physical

3) Residential building at the airport - external

4) There is no air conditioning system in the office - func.

5) Business center without lift - func. etc.

Task 2

Costly approach to real estate appraisal

Determine the cost of a land plot using the cost method.

As a result of observations, the need for the following types of current repairs in the apartments of the rented building was revealed: painting - $ 2,500, replacement of carpets in 5 apartments - $ 1,750, repair of the water supply network - $ 2,200.

Characteristics of elements with a short service life:

Reproduction cost of the building is $ 545930. The 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. The cost of modernizing household equipment is $ 12,000. The cost of the existing household equipment is $ 7370. Loss in income from one apartment due to a poor floor plan is $ 10, due to proximity to an industrial plant - $ 15.

The rolling 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. Disposable:

painting - $ 2500;

replacement of carpets in 5 apartments - $ 1750;

repair of the water supply system - $ 2200.

TOTAL removable physical impairment - $ 6450.

B. Fatal short-term components:

B. Fatal Long Term Components:

Reproduction cost of the building is $ 545930.

Less: physically correctable - $ 6450

Short-term reproduction cost - $ 166,650

Reproduction cost of long-term elements:

545930 – 6450 – 166650 = 372830 $

Wear rate of irreparable long-term components:

372830 * 5/60 = 31068 $

2. Functional wear:

A. Correctable:

Modernization of household appliances ($ 12,000) - Cost of existing household appliances ($ 7370) = $ 4630

B. Irreparable:

Rent loss due to poor floor plan:

3. External or economic depreciation:

Losses in rent due to the proximity of an industrial plant:

Reproduction cost - $ 545930

Less: physically disposable - $ 6450

irreparable short-term - $ 31,700

irreparable long-term - $ 31068

functionally fixable - $ 4630

functionally irreparable - $ 12,000

external wear - $ 18,000

The total cost of buildings, including depreciation, is $ 442,082

Estimated cost of the 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 amort = Actual age / norms term * 100

Vel-na amort = St-th *% amort

In this case, it is irreparable physical wear and tear in short-lived elements, the value of which is 9983

Problem 4

Determine the irreversible physical wear of elements with a long service life, if the cost of reproduction of the object is $ 174900. The cost of eliminating physical wear and tear is $ 2,000. The total cost of elements with a short lifespan 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 storage facility is actually 12 years old and has an estimated remaining useful life of 48 years. The cost for an immediate replacement of the carpet in an office space is $ 1000. Due to poor operation, loading platforms have physical wear 25% higher than the norm, and their standard useful life is 30 years. The platform repair costs are $ 2,500. The expected useful life of the roof, electrical system and mechanical equipment is 18 years. Some of the wiring needs to be replaced, which will require $ 3000. What is the amount of irreversible physical wear and tear?

Unrecoverable wear = wear of long-term elements + short-term building elements = 1250 + 2001 = 3251

1000 rub. - disposable physical wear

Problem 6

The building being assessed requires immediate restoration of leaking roof sections and painting. Determine the amount of wear if the replacement cost of the roof is $ 2,500, painting - $ 1,500, the cost of the necessary roofing work - $ 500 and painting - $ 1,500. What kind of wear is involved in this case?

In this case, it is removable physical wear and tear, the value of which is equal to the amount spent on repairs. The renovation includes the cost of roofing and painting, as well as painting the roof.

Problem 7

It is known that modern standards require the installation of an air conditioner in the building, which is absent in the evaluated object. Installation of an air conditioner in an existing building will cost $ 1,500, and in a new one - $ 1,100.

Determine the amount and type of depreciation.

In this case, this is fixable functional wear, the value of which is $ 400. ($ 1500 - $ 1100).

Problem 8

The electrical fittings installed in the evaluated building do not meet modern market standards. Determine the type and amount of wear, if the replacement cost of the existing electrical fittings is $ 3500, its physical wear is $ 2000. The cost of dismantling the electric fittings is $ 1000 and the cost of installing a new electric fittings is $ 1500.

In this case, this is correctable functional wear, the value of which is $ 4000 ((3500-2000) + 1000 + 1500).

Problem 9

In the evaluated office building there is a warehouse with an area of 500 m2. From the point of view of the best use today, this area is advisable to use as an office. Determine the type and amount of depreciation, if the replacement cost of the warehouse is $ 8000. Physical wear and tear - $ 500. Warehouse liquidation cost - $ 800.

In this case, this is correctable functional wear, the value of which is $ 8,300.

Problem 10

The building being assessed does not have a fire extinguishing system, resulting in a loss of $ 2,000 in revenue. 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 of $ 2,000. The capitalized increase in NPV 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 depreciation in the amount of $ 5,000.

20000 – 15000 = 5000 $

Comparative approach:

Gross rental multiplier

BPM = Selling Price / Annual (Monthly, etc.) Income

Total rate of return

OKK = Num. opera. income (PP + A) / Selling price

Assignment 11

There is market information for 3 recent comparable home sales:

House 1 is the closest in terms of its amenities and location to the object of appraisal, but its landscape is better and this difference is estimated at 5000 ye, the garbage chute is the same as that of the evaluated object, its cost is 16000 ye. Object 1 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 versus normal financing terms)

The House 3 is two blocks from the bus stop, while the assessed property is 8 blocks away. It is believed that from the bus stop it takes away from the cost of the object 3000 ye. The house was sold 2 days ago and does not have a garbage chute.

The rise in prices for this type of real estate is 0.5% per month.

characteristic	Evaluating the th object	Comparative object

Selling price	490000
Date of sale	Now	1,5% (+9000)	3% (+22500)	now
Garbage chute	+	+	+	No (+16000)
Surrounding landscape	Enough	Better (-5000)	Enough	Enough
Financing	market	market	Benefits (-15000)	market
Location	custom	The same	The same	Better than 6 sq. * 3000 (-18000)
Specified price
Number of apartments
Apartment price	24776	24160	22250	24889
BPM	6	6	5,9	6

Adjusted sales prices:

1) 600000 + 9000-5000 = 604000 ye

2) 750,000 + 22500-15000 = 757500 ye

3) 450,000 + 16,000-18,000 = 448,000 ye

via BPM= Sales price / Potential yield

Selling price = BPM * 85,000 = 510,000

Price of 1 apartment of the appraised property:

(24160 + 22250 + 24889) / 3 = 24776 USD

Assignment 11

What are the adjustments for the difference between garages and for the presence of a fireplace

Fireplace 78000-76500 = 1500 ye

Area 83000-78000 = 5000 ye

Garage 83000-1500-80000 = 1500 ye

Assignment 11

To assess the land plot, 3 comparable sales objects were identified:

Characteristic	Appreciating. An object	Comparative object

Price
Square	4 ha	3 ha	4 ha	5 ha
The form	Norm	The same	Better by -1000	Worse by + 2000
The soil	Chorus	The same	Worse by + 500	Worse by + 500
Topography	chorus	The same	Worse by + 1000	The same
Sale time	Now	A year ago	6 months ago	3 months ago
Time correction		2286 (1,5%*12)	1602	922,5
Adjusted price of 1 hectare	4882	4995	4866,5	4784,5
Specified 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 sale price = (4995 + 4866.5 + 4784.3) / 3 = 4882 ye

Cost of the evaluated object = 19690 ue

Assignment 12

Determine the cost of the object, the rent for which is 125 USD per month.

BPM = 15500/130 = 119.2

Avg BPM = 120

Cost of the object = 120 * 125 = 15000 ye

Problem 13.

The evaluated object is located near the airport and is rented for 900 USD. Similar objects in normal conditions are rented for 1200 USD per month. The following sales were identified on the market:

1) at a price of 250 thousand ye with a monthly income of 1000 ye

2) at a price of 300 thousand ye with a monthly income of 1200 ye

3) at a price of 325 thousand ye with a monthly income of 1500 ye

Determine how much the location changes the value of the object

1. Determine the ratio of gross income to the selling price based on recent market transactions BMP = Price / Income

250,000 / 1000 = 250 c.u.

300000/1200 = 250 c.u.

325000/1500 = 216.67 c.u.

2. Determine the loss in income due to the proximity of the facility to an industrial enterprise.

1200-900 = 300 USD

3. Find the average BMR

(250 + 250 + 216.67) / 3 = 238.89 conventional units

4. Determine how much the location reduces the cost of the object.

300 * 238.89 = 71667 c.u.

Assignment 14

The first property with an area of 185 sq m was sold for 72,200 ye, the second property, with an area of 175 sq m, was sold for 70,800 ye. How much the market will appreciate each additional square meter of living space.

Price for 1 sq. M = (72200-70800) / 10 = 140 ue

Assignment 15

Collected data (table). The cost of the apartment is estimated at 16,000 USD. Evaluate the object based on the cost of rooms, apartments and, on the basis of BMR, give a final estimate with a justification for the conclusion.

The gross rental multiple is an indicator that reflects the ratio of the selling price to the gross income of a property. This indicator is calculated for similar real estate objects and is used as a multiplier to the adequate indicator of the evaluated object.

Stages of real estate appraisal using the gross rental multiplier:

The gross income of the assessed object is estimated, either potential or actual;

At least three analogues are selected for the evaluated object, for which there is reliable information about the sale price and the amount of potential or actual income;

The necessary adjustments are made to increase the comparability of analogs with the evaluated object;

The gross rental multiplier is calculated for each analogue;

The final BPM is determined as the arithmetic average of the calculated BPM for all analogues;

The market value of the assessed object is calculated as the product of the average BPM and the estimated adequate gross income of the assessed object.

The probable market value of the appraised property is calculated using the formula:

SN = PVDots (DVDots) xVRMsr (1)

where Cn is the estimated market value of the assessed object; PVDots - potential gross income from the evaluated object; ДВДоц - actual gross income from the evaluated object ВРМср - gross rental multiplier; CA - the selling price of a similar property; or by the formula:

SN = PVDots (DVDots) x (Tsa1 / PDV1 +. + Tsan / PVDan): n (2)

where Tsa1 is the selling price of the first similar object; PVD1 - potential gross income from the first similar object; Цаn - the selling price of the n-th similar object; PVDan - potential gross income from the n-th similar object; n is the number of similar objects. it is considered a market method for evaluating an object of income-generating property, since this indicator takes into account sales prices and gross rental income for properties sold on the market. Example: An appraiser must determine the market value of a property with a potential gross income of RUB 30,000 thousand. The information database contains information about recently sold analogues.

We calculate the average gross rental multiple for analogs and its average value: (105,000: 35,000 + 96,000: 28,000 + 110,000: 31,000): 3 = 3, 3257. BPM does not adjust for differences between the subject of assessment and comparable analogs, since the calculation of BPM is based on actual lease payments and sales prices, in which the above differences have already been taken into account. The market value of the property being evaluated is 30,000 x 3.3257 = 99,770 (thousand rubles)

Index		Meaning
Number of apartments in a residential complex
Monthly rental rate for one apartment, rub.
Potential gross income, thousand rubles
Load factor
Collection rate
Actual gross income, thousand rubles
Manager costs, thousand rubles
Fixed costs, thousand rubles
Variable costs, thousand rubles
Contributions to the reserve for replacement, thousand rubles
Total expenses
Net operating income, thousand rubles

Gross rental multiplier. Gross rental multiplier