Transcript Chapter 17 - ATP Real Estate School

Florida Real Estate Principles,
Practices & Law 38th Edition
Linda L. Crawford
Copyright © 2015 Kaplan, Inc.
All rights reserved.
Chapter 17
Real Estate Investment Analysis and
Business Opportunity Brokerage
Advantages of Real Estate Investments
• Rate of return
• Tax advantages
• Hedge against inflation
– Property values have
appreciated faster than
CPI
• Leverage
• Equity buildup
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Disadvantages of Real Estate Investment
• Illiquidity
– Liquidity is ability to sell
quickly without loss
– Real estate is illiquid
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Market is local in nature
Need for expert help
Management
Risk
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Relationship to the Economy
• Local economy
– Supply and demand factors
• National economy
– Employment, interest rates, construction costs
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Location
• Real property value is affected by its
immediate surroundings
• Situs indicates the influences on value
created by location
– Preference for a certain location owing to factors
such as weather, job opportunities,
transportation
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Destination Properties
• Directs an income
stream to the property
• Service industries
support the needs of a
local community
• Examples:
Shops and retail stores
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Origin Properties
• Originate a product to
seek out an income
stream
• Export activities
• Examples include
Manufacturing plants
Distribution centers
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Physical and Legal Factors
• Physical Characteristics
– Site
– Building
• Exterior considerations
– Curb appeal
• Interior considerations
– Size, number, condition of rooms or offices
• Building operating expenses
• Legal Characteristics
– Rights
– Limitations
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Assessment of Risks
• Risk
Chance of losing all or a part of an investment
• Static risk
Risk that can be transferred to an insurer
• Dynamic risk
Risk that arises from the continual change in the
business environment
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Types of Risks
• Business risk
– Projected vs. actual income & expenses
• Financial risk
– Ability to pay expenses
• Purchasing-power risk
– Related to inflation
• Interest-rate risk
• Liquidity risk
• Safety risk
– Market risk
– Risk of default
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Leverage
• The use of borrowed
funds to finance the
purchase of an asset
• Positive leverage
• Negative leverage
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Example of Positive Leverage
Property with purchase price of $500,000 and NOI of $50,000
1) If purchased with cash
$50,000 ÷ $500,000 = 10%
Investor gets 10% return on equity
2)
If purchased with borrowed funds of 75% LTV loan with
annual payments of $33,310 ($125,000 down payment)
$50,000 - $33,310 = $16,690
Investor receives $16,690 annually
$16,690 ÷ $125,000 = 13.35%
Investor gets 13.35% return on equity
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Business Brokerage
• Business enterprise brokers
• Business opportunity brokers
• Tangible assets
– Physical substance
• Intangible assets
– No physical substance
– Like customer loyalty
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Differences from Real Estate Brokerage
• Involves assets other than real estate
– Personal property (inventory)
– Goodwill – name recognition, reputation, customer loyalty
• Going concern value
– Value of an established business
– Not just physical assets
• Markets are wider in geographic scope
• Shares of stock
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Differences from Real Estate Brokerage
• Short-term liabilities
– Purchaser often assumes short-term liabilities
• Account payable
• Sales taxes to be remitted to state
• Wider geographical market
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Expertise Required in Business Brokerage
• Corporate finance
• Business accounting
• Valuation of businesses
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Accounting Terminology
• Asset—entire resources of a business
• Liability—the debts of a business
• Capital (net worth) - amount by which assets
exceed liabilities
• Cash flow—total amount generated from
investment minus expenses
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Corporate Finance
• Corporate stocks
– Preferred and common
• Securities analysis and
valuation
• Management of working
capital
– Difference between
current assets and
current liabilities
• Budgeting
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Business Accounting
• Income statement analysis
– Summary of income and expenses
– Over a period of time
– Profit and loss statement
• Balance sheet analysis
– Financial position at point in time
– Assets, liabilities, capital
• Cash flow analysis
• Asset depreciation
• Taxation
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Valuation of Businesses
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Comparable sales analysis
Reproduction or replacement cost less
depreciation
Income analysis
Liquidation analysis
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Used for business going out of business
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Steps in the Sale of a Business
1. List the business for sale
2. Identify all assets of business
3. Establish value of business
4. Subtract value of liabilities
5. If a corporation, divide net by number of outstanding shares
6. Check compliance with laws
7. Advertise
8. Find buyer and buyer signs non-disclosure agreement
9. Execute purchase agreement
10. Buyer inspects financial statements
11. Assignment of lease or transfer of title
12. Schedule closing with all parties
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