I’m making a basic real estate valuation model for an acquaintance. It will include net operating income with annual rent increases. I need to build it this afternoon, would anyone mind helping me along who is more familiar with the scenarios in real estate DCF valuation?
Hey, brother. Well, first thing you can tell him is that DCF valuation is a bs method for valuing real estate BECAUSE buyers don’t analyze values that way nor do appraisers, by and large. And if appraisers don’t value property using DCF then banks and other lenders certainly won’t. “Value” is what the buyer will pay for a property in an arms-length transaction, which requires validation from appraisers and underwriters from the lender. The income value approach is a much more widely-used method, as well as the cost approach in insurance and in new construction valuation. Nevertheless, if you want, I can send you my template (email@example.com). Or, I can just tell you some scenarios to consider: net operating income growth (usually an educated guess); risk spread (you can use bond rates or you can estimate); cap rate (usually requires comparable sales, but you can input a generic number for a model), and terminal growth rate (again, estimated–you can look up formula on google). Discount rate is basically your cap rate plus risk spread. It’s a bunch of useless bs either way. Just let me send you mine. LOL.
Or you can just post your contact information.
Thanks bro, email sent.
kkent Wrote: ------------------------------------------------------- > DCF valuation is a bs method for valuing > real estate BECAUSE buyers don’t analyze values > that way nor do appraisers, by and large. have to disagree. this is half my job as an acquisitions underwriter. granted, the model doesn’t tell you what it’s worth, but where your risks lie if you pay X price. i.e. what do rents and cap rates have to be to make my underwritten returns and how likely is it that you will outperform those inputs? at any rate, the model is one of the 2 or 3 most important pieces in the decision making process.
kkent Wrote: ------------------------------------------------------- > Hey, brother. Well, first thing you can tell him > is that DCF valuation is a bs method for valuing > real estate BECAUSE buyers don’t analyze values > that way nor do appraisers, by and large. And if > appraisers don’t value property using DCF then > banks and other lenders certainly won’t. “Value” > is what the buyer will pay for a property in an > arms-length transaction, which requires validation > from appraisers and underwriters from the lender. > The income value approach is a much more > widely-used method, as well as the cost approach > in insurance and in new construction valuation. > > Yeah this is completely off, this is my job. In the income approach appraisers use will typically include both a direct capitalization method as well as a DCF method. The DCF is usually done with an Argus run which is helpful in scenarios where you have fluctuating market rates and/or lots of lease rollover. Not sure why you feel this is a BS way of analyzing commercial properties, its a simple hold period scenario. Sorry but your commercial property is worth what we, “the bank” tell you its worth unless you want to pay cash
Disagree, guys. I was a commercial appraiser and then underwriter. I also work at one of the largest banks on the planet where we analyze commercial real estat loans. We lend based on appraised values–appraisals throw in DCF model as “check” but are never used for the actual value. Assuming the OP is trying to find “value” and assuming we’re not talking about $50 million properties, the buyer uses direct cap, sales comparison or cost approach to obtain a value. In turn, the appraiser uses those methods. In turn, the bank uses those methods. And since I have obtained additional information from the OP, the property in question (less than $1 million) would never be purchased or sold base on DCF. I’ll also add that I do agree DCF has value in analyzing how different interest rates and growth rates will impact the general value of a property in the future. But the fact is, there are SO many inputs required for an accurate DCF valuation as to render the model useless. It requires long-term predictions based on present information, which is why only PE firms and maybe some very large institutional buyers would actually use it to analyze property, and virtually no lenders will use it.
quant, shoot me an email. I have an old RE model.
By the way, I have over 1,200 hours longed toward becoming an MAI (Member of the Appraisal Institute), which is essentially the highest credential for a commercial real estate appraiser. I’ve conducted or worked on somewhere in the neighborhood of 70 appraisals.
LOL, as we speak I’m actually looking at an appraisal at work we just got in for a property in Suitland, Maryland. Two approaches applied: income direct cap ($7,800,000) and sales comparison ($7,880,000). Value concluded to: $7,800,000. DCF not even considered. As the lender, there is $5 million outstanding on the property–our loan-to-value: 64.1%. It’s as simple as that in everyday life, guys. It’s not rocket science. If the OP’s friend wants a loan on his investment, for his own sake, he’d better not consider DCF when he’s making future plans on the sale and investment of money into the renovation. He’ll be laughed out the bank’s door.
ASSet_MANagement Wrote: ------------------------------------------------------- > quant, > > shoot me an email. I have an old RE model. Sent.
Replied. Lemme know if it works.
There are still many appraisals which do not use the DCF, depending on the property type and its status (under construction, stabilized,lease up etc.) There would simply be no point in doing a DCF on a stabilized multi family property where your expecting the economics to remain the same. I do agree there are quite a few inputs neccessary to ensure an accurate DCF. Many appraisers are not going to use one for a small $1MM property, its simply not worth the effort. You are right in that most purchasers perform their own analysis and banks are going to utilize an appraisers info to ensure we are conform to regulatory underwriting standards.
DCF is used throughout UK, Europe and Asia for commercial valuation, both for lending and within funds. It’s kind of a moot point whether it’s really much better than a simple yield but it puts some nice science around it all which is funnily enough often what lenders require. I have never seen an instruction letter from a bank or fund that didn’t specify DCF as method requirement for a comm property of any significance. (I’m MRICS qualified valuer, post qual I worked on an opp fund and now analyst for RE equities)