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Selling Costs In A Direct Capitalizaiton For A Stabilized Value?

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Helpless

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Nov 12, 2014
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We used "selling costs" in a direct capitalization (stabilized) for a commercial property. However, we are getting feedback as follows: "The deduction of selling costs is not normally adjusted in this methodology. Not clear why selling costs were used."

I have seen it done both ways. But assuming this is a "market value" of the fee simple interest...wouldn't it be reasonable to include selling costs? The appraisal assumes the sale of the property on the open market?
 

Michigan CG

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If we go to the simplest type of appraisal assignment, the appraisal of a single-family home in a subdivision, we don't deduct selling costs to come to a Market Value opinion.
 

George Hatch

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If you're extracting your cap rates from the same market segment then it only makes sense to handle the subject's income stream the same way the other transactions are structured. I don't think it much matters which method you choose so long as you're being consistent between your subject and your comps..
 

leasedfee

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Oct 14, 2007
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Colorado
"The deduction of selling costs is not normally adjusted in this methodology. Not clear why selling costs were used."
I agree with this comment. . . . . (and if the seller and buyer do not use a broker?) The proceeds net of selling costs to the buyer is for the settlement statement.
 

Terrel L. Shields

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Arkansas
Most residential comps ignore Cash Equivalence ... despite the "cash" caveat in MV definitions.
 

Helpless

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Nov 12, 2014
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Thanks for the replies.
 

Michael S

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Mar 18, 2009
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New Mexico
Typically I will deduct selling costs in a discounted cash flow analysis because A. that's how it's typically modeled by brokers, buyers, and sellers, and B. you're analyzing future cash flows and it's reasonable that when the property is sold at the end of the holding period that the seller will incur selling costs. In direct capitalization that's just one of the many factors that's implicit in the capitalization rate. Same with tenant improvements or leasing commissions. A property with lots of projected "below-the-line" leasing costs should sell at a higher capitalization rate than one without those anticipated costs.
 
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