Real Property Expense Analyses / Expense Ratios for Appraisers

Not all appraisers have access to a great real property database that includes hundreds of properties and a wide range of property types that can provide
income and expense detail, but even those appraisers who can must often take a hard look at expense information because there is a lot of variability from one property to the next.

For example, my recent look at all Las Vegas office buildings revealed expense ratios between 21.5% and 62.9% with a median expense ratio of about 39.1% over time.  I have attached a .pdf file that may provide you with a frame of reference, at least for properties here in Nevada.

The more expense detail that you review as an appraiser the sooner you will come to realize that, like business entities, there is a total lack of standardized
expense reporting by building owners.  Some self-manage while others pay professional managers, some set aside reserves while others do not and some
owners pay for more services than others and try to get whats paid out back in the form of elevated rents or when possible from common area maintenance (CAM) fees.

Business appraisers use standard, and usually published, annual statement studies that are based on the performance metrics of similar businesses to "reconstitute" the expenses of the business being appraised.  Real property appraisers must, as required by USPAP, similarly make decisions about the reasonableness of owner supplied expenses based on the best available market data.

If the median expense ratio for a property type is for example 35% and your subject property has a 55% expense ratio it's time to take a hard look at each
of the expense categories and consider if the expenses reported are reasonable.  An appraiser may have to conclude that based on the existing lease income and an atypically high expense ratio, a property may have a reduced value. 

We all know that decreases in net operating income (NOI) can transform into large value decreases via capitalization.  So you may want to ask an owner
what's up with his atypical expenses before you finalize your income approach.

For more appraisal information contact Glenn Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada appraiser who can be contacted via email or via his business website Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/.  

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