Question

Prepare a short realistic real estate appraisal of any fictional property of your choice.

Answer 1

Real estate appraisals are an important process and tools to study the intrinsic value of real estate , this can be used by a home buyers or investors. A real estate appraisal find the property's market value or net profit generated by the decision of buying real estate. Even financial institutions or Lenders use process of appraisal before giving loan to potential buyers.

The appraisal can be done for different purpose like,

• for rent investment
• for buying and selling
• for personal use
• lease out business and many more

For example, I would like to appraise a property, with expected holding period of 10 years, expected rent is $ 10,000 per month, with increase of rent income by 3% year on year.

Expenses are in term of management of $ 1000, Insurance $1000 and property tax $200.

Property can be bought by a mortgage of $ 800,000 for 10 years with interest rate of 10%,

	1		2		3		4		5		6		7		8		9		10
Potential Gross Rent	1,23,600		1,27,300		1,31,100		1,35,000		1,39,100		1,43,300		1,47,600		1,52,000		1,56,600		1,61,300
Vacancy Allowance	0		0		0		0		0		0		0		0		0		0
	1,23,600		1,27,300		1,31,100		1,35,000		1,39,100		1,43,300		1,47,600		1,52,000		1,56,600		1,61,300
Other Income	0		0		0		0		0		0		0		0		0		0
Effective Gross Income	1,23,600		1,27,300		1,31,100		1,35,000		1,39,100		1,43,300		1,47,600		1,52,000		1,56,600		1,61,300
- Operating Expenses	2,200		2,200		2,200		2,200		2,200		2,200		2,200		200		200		200
Net Operating Income	1,21,400		1,25,100		1,28,900		1,32,800		1,36,900		1,41,100		1,45,400		1,51,800		1,56,400		1,61,100
- Debt Service	1,16,500		1,16,500		1,16,500		1,16,500		1,16,500		1,16,500		1,16,500		1,16,500		1,16,500		1,16,500
Before-Tax Cash Flow	4,900		8,600		12,400		16,300		20,400		24,600		28,900		35,300		39,900		44,600
- Income Taxes	16,400		18,800		21,400		24,200		27,100		30,200		33,500		37,700		41,400		45,400
After-Tax Cash Flow	-11,500		-10,200		-9,000		-7,900		-6,700		-5,600		-4,600		-2,400		-1,500		-800

Tax purpose calculation:

Marginal Tax Rate:	30%				Input				Input Cost				Depreciation				IRS Mid-month
					Depreciable Basis				Recovery Period				Deduction				Convention*
	Calcs for depreciation expense:			1,00,000			/	20			=	$               5,000				$                   4,800
																* applies to first and last year
Tax Calculations	1		2		3		4		5		6		7		8		9		10
Net Operating Income	1,21,400		1,25,100		1,28,900		1,32,800		1,36,900		1,41,100		1,45,400		1,51,800		1,56,400		1,61,100
- Interest Expense	62,000		57,500		52,600		47,300		41,600		35,400		28,600		21,300		13,400		4,900
- Depreciation	4,800		5,000		5,000		5,000		5,000		5,000		5,000		5,000		5,000		4,800
Taxable Income (Loss)	54,600		62,600		71,300		80,500		90,300		1,00,700		1,11,800		1,25,500		1,38,000		1,51,400
x Marginal tax rate	0.30		0.30		0.30		0.30		0.30		0.30		0.30		0.30		0.30		0.30
Income taxes	16,400		18,800		21,400		24,200		27,100		30,200		33,500		37,700		41,400		45,400

here, the net cash flow after tax is negative for the investor , so , refuse to invest with such mortgage .

Similarly second case of buying and Selling the property as below.

	Purchase price:	1,14,44,500	Selling price:	1,78,00,000
	Transaction costs:	1,50,000	Selling costs:	8,90,000
			Tax rate on capital gains:	20%
			Tax rate on depreciation recapture:	25%

Purchase Price			$ 1,14,44,500
+ Transaction Costs			$       1,50,000
Initial Tax Basis			$ 1,15,94,500
- Cumulative Depreciation			$           49,600
Adjusted Basis Prior to Sale			$ 1,15,44,900
+ Selling Costs			$       8,90,000
Adjusted Basis at Time of Sale			$ 1,24,34,900

Selling Price			$           1,78,00,000
- Adjusted Basis (from Table 11.1)			$           1,24,34,900
Gain on Disposal			$              53,65,100
- Gain from depreciation recapture			$                    49,600
Long-Term Capital Gain			$              53,15,500
Tax on depreciation recapture			$                    12,400
Tax on capital gain			$              10,63,100
Total Tax Liability on Sale			$              10,75,500

Selling Price			$           1,78,00,000
- Selling Costs			$                 8,90,000
Net Sales Proceeds			$           1,69,10,000
- Mortgage Balance			$                               -
Before-tax Equity Reversion			$           1,69,10,000
- Taxes due on sale			$              10,75,500
After-Tax Equity Reversion			$           1,58,34,500

so appraisal can be done for any purpose , of real estate investment.