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Instructor Blog - Credit College - CRE

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The Appraisal Report and Approaches to Market Value (Session #4)


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  • 8/27/2019 3:54:17 PM

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  • Credit College - CRE
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Q: Where do buyers and sellers get cap rates from? Isn’t that something typically calculated by the appraiser?

A: The cap rate is usually not a critical issue for either buyers or sellers. The acquisition price is the key issue. The buyer, however, will always use property NOI (in his or her estimate) and expected price appreciation to estimate his or her return on investment.

Regarding cap rates themselves, the most common source of information are the local real estate brokers who track sales and, if possible, associated net operating income for the property. Many lenders will track cap rates closely in their markets. But keep in mind that it is frequently difficult to identify net operating income, which makes the resulting cap rate a rough estimate. NOI is not publicly available information. Sales prices are.

In a commercial appraisal, the appraisers will extrapolate a cap rate for the subject property.  

Q: The poll question included 'gross rental income', I thought that this was NOT an estimate?

A: Since the information on page 42 represents the appraiser's best estimate of stabilized values for rental rates, vacancy rates, and operating expenses, rather than reports actual rental rates, vacancy rates, and operating expenses, all those value are indeed estimates – or assumptions – on the part of the appraiser.

Gross rental income is the maximum amount if the property were fully leased at the appraiser's estimate of the stabilized rental rate. It is not an actual existing amount of revenue.

Q: Isn't it possible that Sale #4 had some one-time occurrences?

A: Certainly possible, since the new owner intends to fully rehab the property.

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