Real Estate Appraisal Forum

appraisersforum.com logo
The Premiere Online Community for Real Estate Appraisers!
 Fastest Way to Find a Real Estate Appraiser Enter Zip Code:
 
 
Go Back   Appraisers Forum > Real Estate Appraisal Forums > Commercial/Industrial Appraisals
Register Help Our Rules Calendar Archives Mark Forums Read


Closed Thread
 
Thread Tools
  #1  
Old 12-14-2011, 11:56 AM
CANative's Avatar
CANative CANative is offline
 
Join Date: Jun 2003
Location: Hopland, CA
State: California
Professional Status: Certified Residential Appraiser
Posts: 46,059
Default Ellwood technique

aka Mortgage Equity Technique.

I understand the basics (The investment is typically not held forever - there is a "holding period" and that the investor receives the proceeds of the sale at the end of the holding period) but how does the "equity buildup" as the mortgage loan is paid down figure into the equations (models)?
__________________
“The peasants are revolting? Why yes, they are quite revolting.” ~ Oscar Wilde
Sponsored Links

  #2  
Old 12-14-2011, 12:21 PM
Pittsburgh Pete's Avatar
Pittsburgh Pete Pittsburgh Pete is offline
 
Join Date: May 2008
State: Pennsylvania
Professional Status: Certified General Appraiser
Posts: 10,777
Default

the computation (it is a deduction from the constructed rate) is the loan ratio X paid off loan ratio (over the holding period) X the SFF at the equity yield rate for the holding period. This factors in a return on the increased equity amassed over the holding period.

Does that answer your question?
__________________
All our knowledge brings us nearer to our ignorance--T.S. Eliot
  #3  
Old 12-14-2011, 12:27 PM
BRCJR BRCJR is offline
 
Join Date: Sep 2005
State: Virginia
Professional Status: Licensed Appraiser
Posts: 3,136
Default

Quote:
Originally Posted by Pittsburgh Pete View Post
the computation (it is a deduction from the constructed rate) is the loan ratio X paid off loan ratio (over the holding period) X the SFF at the equity yield rate for the holding period. This factors in a return on the increased equity amassed over the holding period.

Does that answer your question?
Is that also true if the property depreciates?
  #4  
Old 12-14-2011, 12:46 PM
CANative's Avatar
CANative CANative is offline
 
Join Date: Jun 2003
Location: Hopland, CA
State: California
Professional Status: Certified Residential Appraiser
Posts: 46,059
Default

Quote:
Originally Posted by Pittsburgh Pete View Post
the computation (it is a deduction from the constructed rate) is the loan ratio X paid off loan ratio (over the holding period) X the SFF at the equity yield rate for the holding period. This factors in a return on the increased equity amassed over the holding period.

Does that answer your question?


RO = YE - M(YE + P 1/SN - RM) - DO 1/Sn

I feel like Abraham Lincoln trying to learn lawyer stuff by reading law books in front of the fireplace.
__________________
“The peasants are revolting? Why yes, they are quite revolting.” ~ Oscar Wilde
  #5  
Old 12-14-2011, 12:47 PM
Pittsburgh Pete's Avatar
Pittsburgh Pete Pittsburgh Pete is offline
 
Join Date: May 2008
State: Pennsylvania
Professional Status: Certified General Appraiser
Posts: 10,777
Default

Quote:
Originally Posted by BRCJR View Post
Is that also true if the property depreciates?
Not in this particular computation. However, there are additional computations that address increases/decreases in both property value and income.

The formula I referenced only addressess increase in the equity and return on that increased equity--a situation that would happen even if the property's value is declining--at some point, however, the equity and the property value might cross paths.
__________________
All our knowledge brings us nearer to our ignorance--T.S. Eliot
  #6  
Old 12-14-2011, 12:52 PM
Ken B Ken B is offline
 
Join Date: Feb 2004
State: Florida
Professional Status: Certified General Appraiser
Posts: 10,358
Default

Quote:
Originally Posted by Pittsburgh Pete View Post
the computation (it is a deduction from the constructed rate) is the loan ratio X paid off loan ratio (over the holding period) X the SFF at the equity yield rate for the holding period. This factors in a return on the increased equity amassed over the holding period.

Does that answer your question?

I'm sorry, but could you put that in a bullet format?
__________________
Those who find themselves at the top of the mountain did not fall there.
  #7  
Old 12-14-2011, 12:53 PM
nstanbru nstanbru is offline
 
Join Date: Feb 2009
Location: Buena Park CA
State: California
Professional Status: Certified General Appraiser
Posts: 747
Default

This might be a duplicate post, I was somehow logged off the site. Try to find a copy of "The Instant Mortgage Equity Technique" by Irvine E. Johnson. It was published for the SREA by Lexington Books/D.C. Heath and Company, 1972. I don't know if Mr. Johnson is still around, but he was located in Ventura, CA.
  #8  
Old 12-14-2011, 12:55 PM
CANative's Avatar
CANative CANative is offline
 
Join Date: Jun 2003
Location: Hopland, CA
State: California
Professional Status: Certified Residential Appraiser
Posts: 46,059
Default

I schlogging my way through this... (It's more than I need to do what I do, but I want to learn more as I go along)

Mortgage Equity Formula
Mortgage financing creates both a mortgage (i.e., debt) and an equity interest in the property, and
each of these interests can be analyzed and valued separately. The total value of a property is the
sum of the values of these two financial components. Mortgage-equity analysis, broadly defined,
refers to any income capitalization or investment analysis procedure that explicitly considers how
mortgage terms and equity yield requirements affect the value of a property. Mortgage-equity
analysis thus includes both the band of investment procedure for estimating a capitalization rate
and discounted cash flow analysis when that technique is used to separately value cashflows to
the equity interest.
A well-known application of mortgage equity analysis is the use of the mortgage-equity (or
Ellwood) formula for developing an overall capitalization rate. The Ellwood formula is similar in
kind to the basic yield capitalization formula discussed earlier, but is different in two ways: first,
it requires a given equity yield rate (YE) rather than an overall yield rate (YO); and second, it
incorporates assumptions regarding the terms of financing (interest rate, length of loan, loan-tovalue
ratio) in addition to those regarding an expected holding period and change in property
income and/or value. Similar to the basic yield capitalization formula, the mortgage equity
formula provides a direct method of solving for the present value of the property, given the set of
assumptions described above, even though both the future value of the property (i.e., the
property’s expected value at the end of the holding period) and the loan amount are based on the
property’s present value. The basic mortgage-equity formula is as follows:
RO = YE - M(YE + P 1/SN - RM) - DO 1/Sn
where
RO = overall capitalization rate
YE = equity yield rate
M = loan-to-value
P = percentage of loan paid off
1/Sn = sinking fund factor (SFF) at the equity yield rate
RM = mortgage capitalization rate (mortgage constant)
DO = percentage change in total property value over the holding period.
The basic mortgage-equity formula can be used only with a level income stream. However, it can
be modified to accommodate changes in income using income stabilization factors (so-called "J"
and "K" factors). A series of tables containing solutions for many of the variables needed to solve
the basic Ellwood formula and its refinements are also available, although these tables are now
largely obsolete given programmable financial calculators and spreadsheet software.69
__________________
“The peasants are revolting? Why yes, they are quite revolting.” ~ Oscar Wilde
  #9  
Old 12-14-2011, 01:00 PM
Michael S Michael S is online now
 
Join Date: Mar 2009
Location: Albuquerque
State: New Mexico
Professional Status: Certified General Appraiser
Posts: 1,052
Default

I came across this page a few months ago when I was looking into the mortgage equity technique. It includes some of the steps in the 12C.

http://www.commercialappraisalsoftwa.../mtgequity.htm
  #10  
Old 12-14-2011, 01:03 PM
CANative's Avatar
CANative CANative is offline
 
Join Date: Jun 2003
Location: Hopland, CA
State: California
Professional Status: Certified Residential Appraiser
Posts: 46,059
Default

Thanks for that link.
__________________
“The peasants are revolting? Why yes, they are quite revolting.” ~ Oscar Wilde
Sponsored Links

Closed Thread


Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Forum Jump




Copyright © 2000-, AppraisersForum.com, All Rights Reserved
     Terms of Use  Privacy Policy
AppraisersForum.com is proudly hosted by the folks at AppraiserSites.com

Fastest Way to Find a Real Estate Appraiser Enter Zip Code:
Partner Sites:
AppraiserUSA.com - National Appraiser Directory AllDomainsUSA.com - Domain Name Registration
DeadbeatListings.com - Deadbeat ListingsAppraiserSites.com - Web Hosting for the Professional Real Estate Appraiser
Find FHA Appraisers - FHA Appraiser Search Commercial Appraisers - Commercial Appraiser Search
Relocation Appraisal - Find Relocation Appraisers Domain Reseller - Business Opportunity
Home Security Buzz - Home Security Info Radon Testing - Radon Gas Info
My Medicare Forum - Medicare Info Stop Smoking Help - Help Quitting Smoking
CordlessPhoneStore.com - Great Cordless Phones AndroidTabletCity.com - Android Tablet Computers

Follow AppraisersForum.com:          Find us on Facebook            Follow us on Twitter


All times are GMT -5. The time now is 03:17 PM.

SiteMap: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93