DCF or Direct Cap

[Paul Ness MAI]

That's pretty much it in a nutshell Bill. They are all tools in the appraiser's toolbox, and it's the competent appraiser that knows when and how to use the appropriate tool(s). When someone mentions capitalization, GIM does not come to my mind. I personally tend to think of it as a unit value indicator and present it (rarely) in the sales approach.

 

[Fred]

Bill:
I think you refer to this from the AI text, The Appraisal of Real Estate.
"GIM's are used to compare the income-producing characteristics of properties in the sales comparison approach. Nevertheless, converting a potential or effective gross income stream into a lump-sum capital value by applying a GIM is capitalization. "

The chapters in the AI text on capitalization are primarily a reprinting of Charles Akerson's indispensable, Capitalization Theory and Technique. The AI text often incorporates the work of individual member-authors. For example, part of the statistics and home design sections are originally from Henry Harrison books.

Akerson includes some other material that goes to the confusion over approaches. Akerson does not subscribe to the three-approach classification system. On page 5 he writes:
At times, the three approaches (if used) are so intertwined, some appraisers prefer the one-approach concept…The semantics of three approaches versus one approach or the chosen format for the appraisal report, however, need not be critical in giving the income capitalization approach its proper place within the appraisal process.
For many years, the AI(REA) texts have omitted critiques or alternative models to the three-approach system, even when the critiques and alternatives come from prominent AI author-members, like Akerson.

As a system of classification of methods, three approaches fails because of its illogical separation of capitalization from sales comparison. Just as Lite Beer can both taste great AND be less filling, appraisal methods can be capitalization AND sales comparison at the same time. It seems obvious that:
Capitalization, when used to find market value is sales comparison, if GIM, Re, Ro, Ye and/or Yo are units of comparison from area sales and regional surveys.
Capitalization, when used to find investment value is not sales comparison, if Re, Ro, Ye and/or Yo are based on individual preference

Gotta go, them ESPN guys are on with the football show.

 

[Tom Hildebrandt]

Talk about a thread that is destined to linger forever. The only thing that is going to outlast this topic is my case before the NCAB!


Best regards

Tom Hildebrandt GAA

 

[Bill_FL]

Steven,

Yes you are right, that is from what I was re-reading. It is interesting that you mention merger of the approaches, as I think this can be directly market related. The investor, when slecting an investment, certainly uses the principal of substitution when comparing the income potentials of competing properties. It would make sense that one could develop an comingled sales comaprison-income approach by using the two approaches as one. At the same time, the cost approach would also be in the back of the investor's mind as it might relate to upgrades, repairs or even considering simply new construction. I would like to see an example of such an appraisal.

 

[Terrel L. Shields]

the three approaches (if used) are so intertwined, some appraisers prefer the one-approach concept…

That seems to be my experience in appraising oil and gas leases. Income is the controlling factor....Adjustments in a Sales Approach are income based or remaining reserves which can be converted directly into a dollar value. The Cost approach is inapplicable for practical purposes because you get into forecasting scenarios that are best applied to risk analysis. Costs for passive interests are non-existance. That leaves you with one of several variations of the income approach. Unit value in ground; DCF; gross multipliers.

Ter

 

[Fred]

Bill,
I am not suggesting merging approaches, but rather that they were never separate to begin with. Example: your comment about a separate "cost approach" in the investors head for repairs. I would suggest that the costs of curing defects are reductions of net income that in turn reduce capitalized value.