UCLA ECON 103 - Chap010 (1) (11 pages)

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Chap010 (1)



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Chap010 (1)

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Pages:
11
School:
University of California, Los Angeles
Course:
Econ 103 - Introduction to Econometrics

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Chapter 10 Valuation of Income Properties Appraisal and the Market for Capital Solutions to Questions Chapter 10 Valuation of Income Properties Appraisal and the Market for Capital Question 10 1 What is the economic rationale for the cost approach Under what conditions would the cost approach tend to give the best value estimate The rationale for using the cost approach to valuing appraising properties is that any informed buyer of real estate would not pay more for a property than what it would cost to buy the land and build the structure The cost approach is most reliable where the structure is relatively new and depreciation does not present serious complications Question 10 2 What is the economic rationale for the sales comparison approach What information is necessary to use this approach What does it mean for a property to be comparable The rationale for the market approach otherwise known as the sales comparison approach lies in the principle that an informed investor would never pay more for a property than what other investors have recently paid for comparable properties The sales comparison approach to valuation is based on data provided from recent sales of properties highly comparable to the property being appraised For a property to be comparable the sale must be an arm s length transaction or a sale between unrelated individuals Sales should represent normal market transactions with no unusual circumstances such as foreclosure sales involving public entities and so on Question 10 3 What is a capitalization rate What are the different ways of arriving at an overall rate to use for an appraisal An overall rate or overall capitalization rate is the rate on the overall property debt and equity One way of arriving at an overall rate is to use the band of investment approach This is based on taking into consideration the investment criteria of both the lender and the equity investor involved in a project This is done by taking a weighted average of the



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