Appraisers' Free Forum

[Edd Gillespie]

Well, I don't think there is really any argument in here, but the conslusion is everybody must borrow money from rogeryodamilt one year at a time and shorten the holding periods way down.

Pineapple seems to be taking umbrage at DCF disparagement and then he sort of agrees that it is magic smoke and mirrors.

[Jim Plante]

I didn't mean to give the impression that DCF should be shunned. It's a good tool--sometimes the only appropriate tool. Just difficult to support correctly.

If you've got a whole raft of similar properties, similar ages, cash flows, access, etc. (like that's a common occurance), then direct cap works well, is easier to support, and faster.

I'm still chewing on what Piña said about making the direct cap come out the same as yield cap. He's right; the value is what it is, and either income method should produce a similar value. I'm having trouble wrapping my head around it, though. Head's been warped by 72 hours of forum construction.

[Edd Gillespie]

Head's been warped by 72 hours of forum construction.

Thanks for not rising above the fray.

[Edd Gillespie]

I'm still chewing on what Piña said about making the direct cap come out the same as yield cap. He's right; the value is what it is, and either income method should produce a similar value.

If so then come anything, including boobs from Oklahoma, the property has the same present value for any holding period you may choose regardless of what the absoption rates , potential income or expenses (especially if you care about net v gross) may be. Is it possible the pineapple is doing something ingenuous?

[Pina Colada]

The point is that the focus is not the methods, but the income stream. What is its probable size? Will it remain flat or will it change? If it will change, will it go up or down?
And what is the probability of the above forecasts? How durable is the stream? Is it perpetual or terminal? Can it be interrupted? If it is interrupted what will happen?

Practical appraisal includes a bunch of short cuts. It is important to know what you are shortcutting and why, or you won’t know when the shortcut won't work. Direct capitalization is a shortcut.

the property has the same present value for any holding period you may choose regardless of what the absoption rates

That’s not quite true. Changing absorption can mean that money stops going out and starts coming in at different times and that should affect present value.

However, if your subject is “stabilized” and in fee ownership, and your DCF value changes every time you change the holding period, then you don’t know how to control your DCF model. I find, at least with DCF, most craftsman blame the tool.

FWIW, I learned all this from Ellwood’s formula.

[Edd Gillespie]

The point is that the focus is not the methods, but the income stream. What is its probable size? Will it remain flat or will it change? If it will change, will it go up or down?
And what is the probability of the above forecasts? How durable is the stream? Is it perpetual or terminal? Can it be interrupted? If it is interrupted what will happen?

Yield cap reflects one appraiser's opinion of the future. Direct cap shows the whole market.

Now I see the tension. rogeryodamilt created this when he decided that the financial future is predictable beyond one year and Jim validated him with the comment quoted above.
roger, do you consider only those loan applications supported by business plans that consider the coming twelve months, or those in which the income stream has been stabilized to the point of being set in cement, so that the all of the future is predicted by te past?

[Mentor]

"It can't be long before we hear the solution to value via direct cap v yield cap is to fire the entire government and start all over again."

Edds proposal would be for government to mandate cap rates, with government grading of quality of the income stream to be applied, as an adjuster to the official, government mandated cap rate. Maybe the function could be partially privatized with M & S turned into a new GSE with a mission to publish the official monthly risk factor tables, as determined by the government office of risk determination.

Then Edd could help M & S publish official costs for the purposes of uniformity in the cost approach documentation produced by state licensed appraisers. I can ask my wife how they did that in the former Soviet Union, where she was a construction engineer and then cross trained as a cost accountant. You did know that Pravda means "truth" in Russian?

It is so easy to identify the colorful new posters, by their wit signatures! Nice debate.

[Mentor]

"do you consider only those loan applications supported by business plans that consider the coming twelve months, or those in which the income stream has been stabilized to the point of being set in cement, so that the all of the future is predicted by te past?"

Edd, generally speaking, UW's are good with a reasonable belief that the income stream may continue for 3 years in order to qualify for A paper conventional loan products. Example: Child support where the payments have been received with consistency for a year and are scheduled for 3+ years are fully considered in income ratios.

My question to you is, knowing what you know about this business & assuming the borrower lives in Ft Myers FL, would you use 100% of last years income from a self employed residential real estate appraiser in qualifying ratios for a new home loan, even if his name was Skippy?

For one thing, even if business picked up this year or next, one bad day in front of an appraisal board could be career ending.

[Edd Gillespie]

[quote="MentorMy question to you is, knowing what you know about this business & assuming the borrower lives in Ft Myers FL, would you use 100% of last years income from a self employed residential real estate appraiser in qualifying ratios for a new home loan, even if his name was Skippy?
[/quote]

I thought we were projecting income streams based on something in addition to last year's income and that it was about coming up with PV of income producing property. Niow we are looking for the FV of an agent's income based on PV of this years income?

[Joker]

DCF is a tool in the same way Roger is a tool. Handy and pleasant, but not good for much.

It depends on the property and the individual circumstance, but I much prefer direct cap.

(Just teasing, Roger).

[Mentor]

Joker: I can take a shot.


Edd, I'm sorry, I thought you switched to a question about residential lending, thus, my reply. Residential mortgage underwriting does consider the projected income stream, but doesn't pretend to forecast future salary growth and then PV it somehow. Or, if they do, it is baked into their assumptions. I'd like to see how they would develop the rate:)

Personally, I think the DCF guys, the Ellwood table freaks, those calculating a tweaked IRR that includes a safe rate to plug in earnings on and possible partial return of capital have more imagination and creativity than many market participants. Showmanship? Rain dance? Report by he pound? I'd have to judge it on a case by case basis, but there is enough of an argument to stir the pot

[Pina Colada]

the Ellwood table freaks, those calculating a tweaked IRR that includes a safe rate to plug in earnings on and possible partial return of capital have more imagination and creativity than many market participants.

Bolding added by me.

Safe Rate: Ellwood's formula has nothing to do with split-rate capitalization (safe-rate, etc.).

Tweaked IRR: In its original form, the Ellwood formula does not find the IRR. It finds the overall rate for direct capitalization. I have a strong suspicion that if you open a text that has the Ellwod formula, it will start with "Ro =" not "IRR =".

Some of these posts strike me as similar to reading arguments that Toyota is a lousy brand of cars because they come with only three wheels and no brakes.

[Mentor]

I was trying to envision multiple images, & had no thought at drawing comparisons such as you outlined, Mr Colonada

My point is that there are lots of reasons that appraisers add complexity and jargon to their work, and some would argue that it isn't to make it more understandable

[Edd Gillespie]

My point is that there are lots of reasons that appraisers add complexity and jargon to their work, and some would argue that it isn't to make it more understandable

Well you make your points the same way the ASB makes theirs. Who'da guessed you wanted to talk about communication? I have experienced the kind of work that is a more re-sale of paper than it is analysis and communication.

But, I thought we were talking about direct cap v yield cap. Are you saying DCF is included to add to the bulk of the report? Do you find there are appraisers who are full of hot air?

What I discovered when I confronted that part of the profession was that it was expected by the clients. I asked, "They want a history lesson and pounds of paper?"

I'm going to start a new thread.

[Pina Colada]

I'm going to start a new thread.

And I am going to take my marbles and go home.