GRM vs. Cap Rate

[Jim Buckner]

What is wrong with using both the GRM and a direct market derived cap rate? If the data is available use both methodologies and see what comes up.

I personally have never been a big fan of DCF models unless you are dealing in institutional type properties or s/d development because the small investores usually don't use those models in their decision making. Additionally how accurate are the DCF's from 3 years ago that were predicting continued price increases or stable expenses? Back to the main point, use as many approaches and methods as needed to arrive at a value that you feel is well supported by the facts.

 

[PropertyEconomics]

DCFs are only as good as the assumptions made to construct them, and THAT, is the real issue with DCFs. They often end up quite unreliable because of the assumptions made within them.

 

[Fred]

DCFs are only as good as the assumptions made to construct them, and THAT, is the real issue with DCFs. They often end up quite unreliable because of the assumptions made within them.

When I was growing up we had a term for that - pilot error.

 

[ZZGAMAZZ]

It was noted during today's live seminar on Prospective Appraisers that large scale developers typically rely on forecasting. Looking at all of the abandoned projects within 50 miles of the seminar site in SoCal makes one wonder how the builders could have got it so wrong.

p.s. Using "pilot error" to describe value projections is very mean spirited...

 

[Fred]

p.s. Using "pilot error" to describe value projections is very mean spirited...

It might be if anyone used it that way. I was saying bad projections or assumptiions are pilot error, while see PE seemed to suggest bad projections and assumptions are the fault of the plane (DCF).

 

[Lost Cause]

I agree that DCF analysis is generally pointless on simple properties.

Additionally how accurate are the DCF's from 3 years ago that were predicting continued price increases or stable expenses?

We need to disabuse people of this notion. As I pointed out in my earlier post, appraisers shouldn't be using their own crystal balls. They should be trying to reflect what's in the crystal balls of market participants. The accuracy today of a DCF done years ago is irrelevant. As long as the assumptions accurately reflect the realistic expectations of market participants, it should accurately conclude to values that make sense in the market at that time.
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And Steven was correct in pointing out that DCFs are well off the OP's topic. As far as direct cap vs rent multipliers, it really does depend on how the market looks at it. I see participants in the small apartment building market (here that would typically be a six-story elevator building) consistently using multipliers. If that's what buyers are doing, it behooves the appraiser to look at it that way, too.

 

[Brad Ellis]

Mr. Rex,

Great post. What a great way to determine owner occupancy vs. vacant- AND confirm perhaps if the subject was rented out previously- assuming the local utility will give up the data.

Brad

 

[Mr Rex]

Heres a link to the article:

http://nl.newsbank.com/nl-search/we/Archives?p_action=doc&p_docid=12090A890575C808&p_docnum=13&s_dlid=DL0108051619115811552&s_ecproduct=SUB-FREE&s_ecprodtype=INSTANT&s_subterm=Subscription%20until%3A%2012%2F14%2F2015%2011%3A59%20PM&s_subexpires=12%2F14%2F2015%2011%3A59%20PM&s_username=FreeAccess&s_accountid=AC0107030117170502657&s_upgradeable=no