Accurately Calculate Market Value (m = c - d + r)

[glenn walker]

So now with more women graduating college than men, making more money than men, still demanding "her man" make 150% of her income, and winning in court 90% of the time, why more men are asking, "Do I want to play this game?"

If an easy formula, who needs us?

ROI is after the fact and nobody ever knows what its going to be until after you have sold the property and anything thrown into the model prior to owning it usually turns out to be dead wrong but it make bean counters and quanta feel like they have accomplished something. Give me any mode and I can and will poke holes in it. I am not against a model to use as a staring point but in the real world of investing almost all models end up being wrong because there are too many unknown variables. Covid-19 decimated a large portion of commercial and office professional and nobody ever woudl have predicated theses super low interest rates so yesterdays model was trash. As far as Contributory value thats another wild card. Anyway my model is The Hill Billy model below which can be calculated on a $5 Wal-Mart calculator. Now wasn't that easy Ethel .

ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100.

 

[RCA]

ROI is after the fact and nobody ever knows what its going to be until after you have sold the property and anything thrown into the model prior to owning it usually turns out to be dead wrong but it make bean counters and quanta feel like they have accomplished something. Give me any mode and I can and will poke holes in it. I am not against a model to use as a staring point but in the real world of investing almost all models end up being wrong because there are too many unknown variables. Covid-19 decimated a large portion of commercial and office professional and nobody ever woudl have predicated theses super low interest rates so yesterdays model was trash. As far as Contributory value thats another wild card. Anyway my model is The Hill Billy model below which can be calculated on a $5 Wal-Mart calculator. Now wasn't that easy Ethel .

ROI is calculated by subtracting the initial value of the investment from the final value of the investment (which equals the net return), then dividing this new number (the net return) by the cost of the investment, and, finally, multiplying it by 100.

Generaly, Sale or Income preceeds ROI. If there is no income, then the sale is the determining factor. And with income, you have to no doubt make assumptions about the future income stream.

But there is for many owners an "in use" value that may not be related to income. So, in some cases, from a certain point of view, there clearly is an ROI, only there is no good way to estimate its value. You can put the house up for sale - and you get market value. And from the point of view of looking at your property purely as an investment you can derive a value for the ROI. But that overlooks the in-use value, such as a place to sleep, store items and provide the other functional utility you and possibly your family needs.

So, in many many ways the forumula v= c - d + r although somewhat true, is useless.

This one is better:

m + i -c -> r

1. Sell the property to get the market value.
2. Add in the income derived from ownership over the ownership period
3. Subtract the original cost.
4. Throw in discounting if you want.

And you have r.

What happened to depreciation? Who cares, really? (Hint: MV)

 

[App3000]

In my investment book If I -We can extract the contributory value it may or may not have any effect on my ROI because Contributory value is often confused with Utility Value but in reality it rarely adds any real value to the property physically or financially or increase the net cash flow or ROI.

Also contributory value is most all in the eyes of the beholder and is something where different market participants being the buyers and sellers determine. In my book to include it in your physical depreciation and then also want to include it in your ROI is a flawed model.

Example:
We had once purchased a 20 unit building that had an-Olympic Size Swimming Pool in the Center of the Courtyard. The CG who appraised it gave some big number for the pool like $75,000 and me being-young and dumb thought people would pay higher rents if they could enjoy this amenity which would also increase our ROI. We closed escrow and summer hits-Pool parties-no life guard-insurance carrier raises our premiums and finally it was a total nuisance that most of the tenants did not like and we were scared to death someone would drown in it. So we ended up in year two getting a demo-permit-breaking out the bottom and bringing in load after load of expensive fill dirt and compacting it. Then months later we found out it had not been compacted properly and more money spent. All total over a $35,000 loss all based on my ignorance of thinking like the CG that it was a positive for both contributory and ROI. After that I learned to never mix up or confuse the two.

Please remember that ROI can be a positive or a negative value. If you or the CG had calculated the correct ROI for the pool then this would not have been a surprise. Assuming that a pool adds value is a flawed belief. You need this equation.

 

[App3000]

Well yes, that equation pretty much explains things. Only it is absolutely useless. You can't actually get "r" without determining "m" and vice versa. It's a circular dependency. Of course, the caveat being that you have failed to accurately define your terms. I assume ROI is determined by the resulting market value, because otherwise the equation is not categorically true.

This is BS.

Continuing to use an equation that is incomplete and only works part of the time is insane. (m = c - d + r) works every time and provides a pure understanding of the contributory value of a feature.

 

[App3000]

So now with more women graduating college than men, making more money than men, still demanding "her man" make 150% of her income, and winning in court 90% of the time, why more men are asking, "Do I want to play this game?"


If an easy formula, who needs us?

The equation is only easy after you have determined the values for each variable. Without appraisers, the equation sits empty with no understanding or explanation.

 

[alebrewer]

If true 'c' is known, and IF the appraiser is able to accurately assess ALL FORMS of 'd', then I can see the equation having merit. Problem is that: (a) true cost is often not known; estimation of total cost by cost guides is a leap of faith at best; (b) while physical depreciation can be measured with some degree of confidence (assuming TEL and EA are known), functional and external obsolescence (which are technically not depreciation) are much more challenging to estimate - especially if one is not doing some kind of SCA. Thus your 'c' and your 'd' are often PFA, and I think we all know what PFA refers to.

 

[App3000]

If true 'c' is known, and IF the appraiser is able to accurately assess ALL FORMS of 'd', then I can see the equation having merit. Problem is that: (a) true cost is often not known; estimation of total cost by cost guides is a leap of faith at best; (b) while physical depreciation can be measured with some degree of confidence (assuming TEL and EA are known), functional and external obsolescence (which are technically not depreciation) are much more challenging to estimate - especially if one is not doing some kind of SCA. Thus your 'c' and your 'd' are often PFA, and I think we all know what PFA refers to.

I disagree that "estimation of total cost by cost guides is a leap of faith at best". If you're not confident in performing the cost approach, then I beg you to take courses needed to become an expert. Also, the cost guide you choose to use is important as well. I have found the Marshall & Swift residential cost handbook to be very accurate. If you are using less credible (cheaper) resources for your cost data, then you may produce inaccurate results. In my opinion, the cost approach is more often relevant than not and should be performed in most appraisals. Thank you for your response.

 

[alebrewer]

If you're not confident in performing the cost approach, then I beg you to take courses needed to become an expert.

(a) I assure you - I'm extremely well versed in development of the CA - hence my disdain for it. (b) why would you care whether I become an expert or not? Certainly not to the point of begging? You don't even know me... (c) I've found that M&S is no more, or less, accurate than some of the alternatives on the market. (d) cost and credibility are not necessarily directly correlated. (e) I'm glad you find the CA more relevant than not - after all, it's YOUR signature on YOUR reports. (f) You're welcome for my response.

 

[RCA]

Continuing to use an equation that is incomplete and only works part of the time is insane. (m = c - d + r) works every time and provides a pure understanding of the contributory value of a feature.

Actually it doesn't work every time.

Income is missing for rental properties. In-use value is missing, although we can assume that in-use value is simply not a part of the standard definition of ROI.

According to your equation if I buy a home for $10M and it depreciates by 100% before I sell it for $10M, the return on investment is $10M.

$10M = $10M - $10M + ROI ---> ROI = $10M - $10M + $10M = $10M.

If we divide that amount by the cost in order to express it as a percentage, as is typical, that is a 100% ROI. Wow!!

If you ask me, all you have done is break even, i.e. ROI=$0/0%.

So, what is wrong with the formula? For it to work, you have to eliminate depreciation!!! So, if there is 0% depreciation, you pay $10M and sell for $10M, you have $0 ROI. If you sell for $20M, you have $20M- $10M = $10M ROI, or 100% ROI.

So, do you begin to understand?

Or, put it this way, in your equation, you fail to realize that deprecation is reflected, i.e. included, in MV. Cost and Depreciation are events that occur before the sale. Yet Depreciation is really best defined by the Sale/MV. So then, which comes first the Depreciation or the ROI? Where and how do you split the Sale Price between deprecation and ROI? You can't really. And, in fact you don't need to. The Depreciation is already deducted in the Sale Price, because people simply do not pay for depreciation. So, given that your calculation actually must start with the MV, by deducting Depreciation from the right hand side of the equation, you are forced to add it to the left hand side, and so you cancel out the effect of depreciation on ROI, and thus your error.

Or another way:

Your equation m= c-d+r.
or
r = m-c+d.
but
why would you add d to m? That simply cancels out the impact of depreciation. Or in other words if you buy an investment property, taking good care of it has no impact on the ROI. Hmmm. That just doesn't make any sense.

Also, your equation, ignores the impact of time and event dependency.

Which brings up the subject of maintenance costs.

And of course, as already mentioned, there is the time value of money.

There goes your beautiful formula.

Real estate is far more complex than most people realize.

 

[RCA]

Also:

The Most Common Mistake People Make In Calculating ROI

Profit is not the same as cash.

hbr.org