Appraisal Articles 2019 Free Appraisal Articles for Appraisers and the Public

Latest News

Note about "Views" reported on this site

Feb 7, 2014

I just want readers, contributors and potential contributors to realize that the...

This Site is Monitored

Dec 28, 2013

Articles that are not deemed contributory are removed from this site promptly, so we would...

New Site Template

Nov 30, 2013

Please pardon our somewhat painful transition, we have been working with Subrion.com...

Using Ratios and Multipliers in Appraisals

by Administrator on May 23, 2016 Narrative Writing 1715 Views

It's not news to most real property appraisers that discovering every possible indicator of value can get you closer to a credible market value opinion.  We all know that we consider all three appraisal approaches to value but when buyers and sellers use ratios and multipliers like; floor-area-ratio (FAR), land-to-building ratio, gross income multiplier (GIM) and capitalization rates appraisers must know what's being considered.

While ratios and multipliers are usually considered "simplistic" by appraisers they can at times provide an indication as to whether a property is comparable with its peers.  Of course there are lots of variables related to the figures being reported like accounting methods and expense manipulations that can skew ratios and multipliers.  Ratios and multipliers also tell you only about a property as of a single moment in time and they also do not consider risk or returns over time.

Depending on property type there can be a number of ratios and multipliers that market participants recognize and / or use for comparison.  Properties that include a business entity often offer more ratios and multipliers that are business specific.  As an example golf courses are evaluated based on membership fees, total rounds played, golf fees, cart fees, water costs, merchandise sales and a number of income sources and expenses.  Often considered are; a total revenue multiplier, a golf revenue multiplier, a green's fee multiplier and a rounds multiplier.  Golf course risk is often evaluated based on loan-to-value ratio, market share percentage and debt service coverage ratio. 

Health care facilities are another property type that is often compared based on; the number of beds in a facility, bed types, service types, income per bed, income per service type and various expense ratios.   The price to revenue multiplier is an important health care facility criterion that is often considered by buyers when they evaluate a health care facility since it tells them relatively how strong revenues are for any given facility relative to others.  

Vacant land is often restricted by ordinances or zoning laws that dictate what portion of it can be developed.  If steep hillsides exit on a property, then there may be little or no portion useful for development and a “disturbance” percentage may restrict development even when topography would allow it. 

Even real properties (without business entities) are often compared to each other using; land-to-building ratios, floor-area-ratios (FAR), parking spaces to building area (per 1,000 SF) ratios, coverage ratio, gross income multipliers and net income multipliers.  Appraisers use many ratios and multipliers without even thinking about them.  Buyers and sellers often get caught up in the ratios even though they do not always provide the best indication of value.

Of course capitalization rates are basically ratios that relate income to sales price and they are extremely important to appraisers when they analyze income generating properties.  Appraisers consider direct market comparisons in direct capitalization and rates provided by other sources like RealtyRates.com and PriceWaterhouseCooper.com (PWC).

Naturally there are different capitalization rates associated with different property types in different areas, since they have more or less risk associated with holding each of them.  Healthcare facilities in the southwest may command a 7.0 cap rate while retail properties in the same area may command a 5.0 cap rate.

Ratios and multipliers are very important to appraisers and it is important for them to understand which valuation measures are being used by market participants.  While an appraiser may be able to complete a credible appraisal without considering the typically used valuation measures in my opinion it is better to include information that buyers and sellers are relying on even if they don’t provide the most compelling evidence.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as 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/

Article source: http://www.appraisalarticles.com/Narrative-Report-Writing/4616-Using-Ratios-and-Multipliers-in-Appraisals.html

admin

Administrator

Articles: 339 Contact author

Most Recent Articles

Commercial Appraisal Data Sharing

Jun 12, 2019 547 Views

Appraisal Theory versus Reality

Apr 27, 2016 1307 Views

Is Traffic Count Important to Appraisers?

Aug 18, 2015 1581 Views