Property Valuation and Real Estate Finance
Approaches to value and the math of financing
Market value assumes a willing, informed buyer and seller, no undue pressure, and reasonable exposure time. Highest and best use is the legally permissible, physically possible, financially feasible use producing the highest value.
Three approaches. Sales comparison (adjust the comparables toward the subject, never adjust the subject). Cost approach (replacement cost minus physical deterioration, functional obsolescence, external obsolescence, plus land value). Income approach (NOI divided by cap rate equals value; price divided by gross rent equals the GRM).
Finance basics. The note is the promise to pay; the mortgage or deed of trust pledges the property as collateral. Loan-to-value equals the loan divided by the lower of price or value. PITI means principal, interest, taxes, and insurance. One point equals 1% of the loan amount, and the APR exceeds the note rate because it wraps in fees. Conventional qualifying often uses a front-end ratio near 28% and a back-end ratio in the 36–43% range.
Consumer rules. TILA/RESPA integrated disclosures, ECOA (no discrimination in credit), RESPA Section 8 (no kickbacks for referrals), and fair-lending rules against redlining. A CMA is not an appraisal; licensees give opinions of value, and appraiser independence is required by federal law.
Worked example: A fourplex produces $72,000 gross income; 5% vacancy ($3,600) and $30,000 of operating expenses give NOI of $38,400. At an 8% cap rate, value is $38,400 divided by 0.08, or $480,000. Debt service is not an operating expense.
Trap: questions sneak mortgage payments into operating expenses, or have you adjust the subject instead of the comparables, or blur a CMA with an appraisal.