Evaluation of Foreign Properties

Evaluation of Foreign Properties

How do appraisals get done in markets that are not transparent? In the developed world we can use comparable sales. How does one get comparable sales on properties when the records are either non-existent or fraudulent? There is no really good answer to this dilemma; but there are ways of getting pretty close to the value.

On income properties it is relatively easy to get the rent paid on the particular property or see the rent advertised for similar properties. One should keep in mind that asking rent and the amount accepted may be different. Capitalization rate is the amount of net income divided by the purchase price. From this number something should be subtracted for “risk premium” before comparing the yield with investments in other countries or even other types of properties.

In emerging markets, the yield is seldom in line with the price. The properties in many of these areas are appreciating so fast that prices outstrip rents quickly. One way of accounting for this phenomenon is to use the Internal Rate of Return. The internal rate of return discounts all the projected cash flows plus a reversion at some point in time back to the beginning of the investment. All of the cash flows should produce a net present value of 0% when discounted back to the beginning.

There are several problems with this method. The main problem is that the further away from the beginning of the investment the projection goes, the more inaccurate it will be. In any market quickly rising prices are something like a game of musical chairs. The property keeps selling for a higher and higher price. When the music stops the price stops increasing or declines and the last person is left with an overpriced property.

Another problem with internal rate of return is that it assumes all cash flows are reinvested at the same rate as the investment being measured. This is not necessarily the case. A financial managers rate of return assumes small amounts of money are reinvested at a “safe rate” until enough money is accumulated to reach a “reinvestment threshold”. At this point the money is assumed to be invested at a “reinvestment rate”. This gives a better method for comparison.

For user properties total cost of occupancy can be used to compare properties. This does not really establish a market value. The next blog will consider total cost of occupancy.




David Segrest is a REALTOR in Charlotte NC. His website is http:www.segrestrealty.com .