- Joined
- Jan 14, 2002
- Professional Status
- Certified General Appraiser
- State
- Pennsylvania
Red and I talked about appraisers not using proper capitalization terminology in another post. If appraisers can’t get it right, how do we expect the clients to understand?! :? Today I received an appraisal to review which was done for another bank and the appraiser is not on my approved list (and will remain so). I had to share this garbage.
First, in the income approach, the appraiser titled the cap section “Development of Overall Discount (Capitalization) Rate” and went on to use the band-of-investment to build the overall rate for direct cap. Well, right off the bat, the discount rate and overall cap rate are two different animals!
Second, she goes on to present the formula for her “rate of return”
as follows:
Ro = (M x Rm) + (E x Ye)
Ok class, can anyone see the error in this? I’ll give you a hint, she goes on to define the items in the equation and EVEN defines Ye correctly as “before tax equity yield (discount) rate”.
If that wasn’t enough, she then titles the next sub-section “Development of the Mortgage Yield Constant (Rm)” OUCH– my head just exploded 8O ! It is the mortgage constant (aka mortgage cap rate) and not the mortgage yield that should be used in the direct cap formula. The term “yield constant” is a true oxymoron. The mortgage yield changes as the mortgage is paid down, while the constant remains........well, constant (wow what a concept :? ).
In her qualifications, this appraiser discloses that she is a certified general appraiser, a designated CREA and a GRI. In addition to a small number of other classes cited, she has taken The Income Approach to Valuation and Real Estate Finance. How about another poll…education vs competence!!!!!
Forgive me for being giddy, but this appraisal made my day! :twisted:
First, in the income approach, the appraiser titled the cap section “Development of Overall Discount (Capitalization) Rate” and went on to use the band-of-investment to build the overall rate for direct cap. Well, right off the bat, the discount rate and overall cap rate are two different animals!
Second, she goes on to present the formula for her “rate of return”
Ro = (M x Rm) + (E x Ye)
Ok class, can anyone see the error in this? I’ll give you a hint, she goes on to define the items in the equation and EVEN defines Ye correctly as “before tax equity yield (discount) rate”.
If that wasn’t enough, she then titles the next sub-section “Development of the Mortgage Yield Constant (Rm)” OUCH– my head just exploded 8O ! It is the mortgage constant (aka mortgage cap rate) and not the mortgage yield that should be used in the direct cap formula. The term “yield constant” is a true oxymoron. The mortgage yield changes as the mortgage is paid down, while the constant remains........well, constant (wow what a concept :? ).
In her qualifications, this appraiser discloses that she is a certified general appraiser, a designated CREA and a GRI. In addition to a small number of other classes cited, she has taken The Income Approach to Valuation and Real Estate Finance. How about another poll…education vs competence!!!!!
Forgive me for being giddy, but this appraisal made my day! :twisted: