The impact of market conditions using appraisal models

Abstract

PurposeThe paper aims to generate estimates of appraised value using two present value appraisal models. Financing for a commercial property is contingent on an appraiser estimate of value. The paper seeks to address the issue of which approach generally provides more conservative estimates‐of‐value.Design/methodology/approachThe Comparative‐Income Growth Model and Mortgage‐Equity Capitalization models are presented and discussed. Estimates of return to equity while holding the lending rate constant are calculated. This analysis is followed by a mathematical side‐by‐side comparison of the value estimated generated by the respective models.FindingsDepending on the discount rate selected using a fixed lending rate the models yielded comparatively higher, the same or lower estimates of value for a hypothetical commercial property. The mortgage‐equity capitalization model yielded significantly high estimates of value at lower discount rates, but at higher discount rates, the comparative‐income approach estimates were comparatively higher.Original/valueA systematic comparison of the appraised values yielded by these two income models has not previously been undertaken in research literature. Explicitly indicating the underlying‐return on equity assumptions for given discount rate has not previously been shown.