Chapter 12 Notes – Comparison ScreeningIn this chapter, the quantitative bunnies truly come home and multiply. Use your formula sheetexhaustively. Recall those real estate valuation formulas from chapter 11:1. Income Measures: Net Income Multiplier, Gross Income Multiplier2. Rate of Return Measures: Equity Dividend Rate, Capitalization Rate 3. Operating Ratios: Loan to Value Ratio, Debt Service Coverage Ratio, Break Even Ratio andOperating Expense Ratio We observe each of these metrics by example, using the data on Venetia Plaza in your course packet. Basically, income measures such as the income multipliers (NIM, GIM) can be used to estimate propertyvalue. The cash-on-cash return measure or equity dividend rate (our most favorite measure ofall!!) is simply a rule of thumb evaluation method that compares the equity portion of aninvestment with the amount of cash derived from that investment; this measure (the EDR or cashon cash return, see page 225 of your text) ignores mortgage pay-down and taxes, but it is a great“back of the envelope” way to get a solid first impression about a given real estate investment.This measure is sometimes called the “cash flow to equity ratio.” True estimates of a property’s value are typically provided by a qualified professional who provides bothlenders and investors nothing more than an estimate of value. As we learned early in this course,there is no active real estate market to give an hour-to-hour or day-to-day or even month-to-month exact estimate of value, so the appraiser and the investor together employ a multitude oftools towards ascertaining a property’s defensible value.The three basic approaches to value are the cost, income and market approaches; each of theseapproaches is well-suited for different types of property. The cost approach is well-suited for unique properties and involves estimating the total cost of a realestate investment and reducing that cost by estimating depreciation of the improvements.The market approach is best for single-family homes and involves comparing a home’s value to similarrecently-sold homes and adjusting the home in question for any differences between it and the“comp.” (For ex, reducing the subject property for fewer square feet or greater age…seeclassroom example)The income approach is our most favored approach to estimating real estate investment value, as itbreaks down a given income-earning piece of real estate to a set of numbers, which are thendiscounted depending on the age and location of the subject property. I.e., higher discount ratesand lower values for a property producing $100,000 in Leland vs. Wrightsville Beach. A feasibility study may extend a simple appraisal by supplementing the appraisal with a competitivemarket evaluation, though some income property appraisals will include broad analyses of thecompetitive market in the appraisal. Real estate value is an imprecise concept, but it must beaddressed in some fashion for the existing or prospective RE investor to have, as they say, even a“snowball’s” chance.Problems 1, 2 and 4 – 11 (all except problem number 3) look like a great review at the end ofChapter