Valuation, Pricing, and Market Analysis
Three approaches to value
Candidates must know the sales comparison approach (most reliable for residential), the income approach (capitalisation of net operating income, used for investment and commercial property), and the cost approach (replacement cost less depreciation plus land value, used for special-purpose property). Key concepts include market value, highest and best use, comparables adjustment, gross rent multiplier, and capitalisation rate. Bermuda-specific factors include limited land supply, planning restrictions, hurricane exposure, and the influence of the international business sector on demand.
Traps to watch
Examiners test whether an appraiser should adjust a comparable upward or downward for a feature the subject lacks. Remember that adjustments are made to the comparable to make it like the subject, not the reverse. Watch for confusion between price, cost and value, and for the trap of relying on a single comparable. Also note that a capitalisation rate rise lowers value, and that a gross rent multiplier ignores operating expenses.
Rule of thumb
Value = net operating income divided by the capitalisation rate. If NOI is $120,000 and the cap rate is 6 percent, value is $2,000,000.
Worked example
A comparable sold for $1,000,000 but lacks a pool the subject has, worth $50,000. Adjust the comparable upward to $1,050,000 before comparing it with the subject.