Topic 38

There are 3 approaches to valuation activities:

1) cost-based (uses those enterprises that potentially do not generate income, but it is necessary to evaluate the property) 2) comparative (can be used to evaluate any property, but if there is sufficient information about the results of recent sales), 3) profitable (2 methods based on: the main one is the direct capitalization method and the method of discounting future income (suitable for those types of property that are capable of generating income, as well as when valuing a block of shares).

Mortgage investment analysis - a type of income approach that is used to evaluate real estate purchased with a mortgage loan. Feature: the market value of the asset does not coincide with the amount of equity capital invested in it, since the real estate was partially purchased with borrowed funds.

Income capitalization method - the value of the object is determined based on the conversion of annual net operating income into value using a capitalization ratio, which includes the rate of return on investment and the rate of return of capital. The capitalization rate depends on:

1) the investor’s requirements for the rate of return on invested equity capital, 2) the interest rate, loan term, mortgage debt ratio.

Discounted cash flow method - the value of real estate consists of the amount of the mortgage loan received and the current value of equity. Equity = the investor's discounted cash income for the holding period + the discounted proceeds from the proposed sale at the end of the holding period.

Specificity:

1) the discount rate corresponds to the rate of return on equity capital required by the investor, 2) the appraiser used cash receipts on equity capital rather than net operating income as income for the holding period.

3) the proceeds from the proposed sale of real estate at the end of the period is the difference between the resale price and the balance of mortgage debt at that date.

So, Mortgage Investment Analysis is a simulated income approach to real estate valuation. During the evaluation process, it is necessary to analyze the specific financing conditions of the property being evaluated and compare them with typical market financing conditions. Based on the identified differences, an appropriate adjustment for financing conditions is calculated, which transforms the fair market value of the property into a price.

Authors: Shevchuk D.A., Shevchuk V.A.

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