A person holding a paper and analyzing financials

Determining current property values is a critical part of underwriting and risk management, especially in today’s market.

Revaluing real estate collateral is vital during the annual review process and is both an industry best practice and increasingly a regulatory requirement. For income producing real estate CUBG recommends the income approach to value using the current property Net Operating Income (NOI) or Cash Flow and applying a current capitalization (Cap) rate.

You can find current cap rates from a variety of sources including local and national real estate brokerage firms, by reviewing recent appraisals on similar properties, or obtaining rates from appraisers.

Then calculate the NOI, or the gross revenue from the property, minus all necessary operating expenses.

Example:  NOI Cash Flow Analysis

To derive the current value, divide the NOI by the Cap Rate.

NOI ÷ Cap Rate = Current value based on income

In the case of the above example:

NOI = $91,865
Current and Updated Cap Rate = 7%

$91,865 ÷ .07 = $1,312,357 is the value using the income approach with the updated cap rate.

Often lenders rely on the original appraisal or tax value in their annual reviews. These sources can often be misleading due to the age of the appraisal or the inaccuracy of tax values.

The following example shows how the income approach can bring clarity and accuracy to the revaluation process.

LTV Using Tax Value and Cap Rate

For owner occupied real estate revaluation can be much harder.  CUBG recommends using a variety of sources such as tax value, the original appraisal, and commercial real estate sales listings from websites.  You could also obtain a third-party valuation report or a Broker’s Price Opinion (BPO) on any property to verify your LTV update.

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