I'm not an appraiser, although I've prepared a few CMA's and BPO's pro bono on napkins for pals at Starbuck's.
Appraisers consider what they call the comparable sale method to be the most reliable means of calculating and estimating the capitalization rate which is the rate of return which a property is supposed to give back or return to the owner after their investment.
The appraiser has to be in possession of reliable, decent, passable sales data to derive at what is considered to be a direct capitalization rate for the subject property.
The capitalization rate is derived by analyzing the incomes and the sales prices of properties that have been sold.
The formula for determing the capitalization rate is achieved by dividing the income of a property by it's sales price.
As an example:
A property is recorded as having sold recently for 300 thousand dollars and the properties annual income is estimated to be 30 thousand dollars.
so: 30k divided by 300k = 0.10 or 10%
or a capitalization rate of 10%.
Remember, market changes and other variables may affect the capitalization rate.
Talk to your appraiser about the capitalization rate and how they use it.
How have you seen it used in commercial and residential valuation?
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