Property Valuation
An appraiser in Jackson, Mississippi values a property using the 'direct capitalization' method. After estimating NOI, the appropriate cap rate is derived from:
AThe appraiser's personal opinion
BMarket extraction from sales of comparable investment properties✓ Correct
CThe seller's desired return on investment
DPublished IRS tax tables
Explanation
In direct capitalization, the cap rate should be derived from market data — specifically by analyzing recent sales of comparable investment properties, calculating their NOI ÷ Sale Price ratios, and using those market-extracted rates to value the subject property.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Comparable Sales (Comps)Recently sold properties similar in size, condition, and location used by appraisers and agents to estimate a property's market value.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Math Concepts
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