A finished FIN-432 Topic 2 three-approach value reconciliation example, valuing twelve apartments by sales, income and cost, then reconciling 1,620,000, 1,600,000 and 1,537,500 without averaging them. Searches like "fin 432 topic 2 assignment example", "fin432 topic 2 sample" and "fin-432 topic 2 example" land here.
What a finished FIN-432 Topic 2 three-approach value reconciliation looks like
The finished valuation builds income first. Twelve units at an illustrative 1,250 a month give potential gross income of 180,000; 5 percent vacancy and credit loss and 3,000 of laundry income leave effective gross income of 174,000, and 70,000 of operating expenses leave net operating income of 104,000. Capitalized at 6.5 percent, a rate drawn from the comparable sales, that indicates 1,600,000. Three sales, adjusted for age and location, indicate 133,000 to 136,500 a unit, and the least-adjusted sale supports 135,000, or 1,620,000. The cost approach adds 300,000 of land to 1,650,000 of replacement cost less 25 percent depreciation, 1,537,500. Reconciliation settles on 1,600,000: buyers of apartments price income, the sales corroborate it within 1.25 percent, and the cost figure trails because depreciation on a thirty-year-old building is itself an estimate.
How a FIN-432 Topic 2 example is structured
The valuation runs each approach in full before comparing any of them. The composite building's rent roll and operating history are presented first, all of the figures invented. The income approach section builds from potential gross income down to net operating income line by line, then explains how the 6.5 percent rate was extracted from comparable sales. The sales comparison section tables the three sales, states each adjustment and the reason for it, and identifies the sale needing the least adjustment. The cost approach section estimates land value, replacement cost new and depreciation, marking depreciation as the weakest input. The three indications then appear together in one table. The reconciliation section gives each approach a weight in words, explains every gap, and states the final value. A last paragraph lists what would move the estimate most, beginning with the capitalization rate.
Income built down to NOI
Potential gross income, vacancy, other income and operating expenses are shown in order, so every dollar of the 104,000 of net operating income has a visible source.
A rate extracted, not assumed
The 6.5 percent capitalization rate comes from the comparable sales' own income and prices, which ties the income approach to what buyers actually paid.
Adjustments stated sale by sale
An older sale is adjusted up 5 percent and a better-located one down 5 percent, leaving the least-adjusted sale at 135,000 per unit as the anchor.
Depreciation marked as the weak input
The cost approach's 25 percent depreciation on a thirty-year-old building is an estimate, which explains why that indication trails the other two.
Reconciled with reasons, not arithmetic
The final 1,600,000 rests on the income approach, cites the sales as corroboration within 1.25 percent and explains why the cost figure is given least weight.
Where marks go in FIN-432 Topic 2
Averaging the three indications is the error singled out most often, because a mean of 1,620,000, 1,600,000 and 1,537,500 conceals why they differ and takes a stance on none of them. Capitalizing the wrong income cannot be rescued: 6.5 percent applied to the 180,000 of gross rent instead of net operating income produces about 2,769,000, far above any sale. Operating expenses that include mortgage payments corrupt net operating income, since financing belongs to the buyer and not to the building. A capitalization rate stated without its source cannot be checked against the market. Comparable sales used without adjustments, or with adjustments that carry no reasons, turn the sales approach into a list of prices. A cost approach given equal weight with the others, for an older income property, ignores how uncertain its depreciation is.
Get a FIN-432 Topic 2 example written to your instructions
Send the FIN-432 Topic 2 instructions and your classroom rubric, with the property data or case your section provides. We write a custom example to them, with income built down to NOI, a capitalization rate sourced from the market, sales adjusted with reasons, a cost approach estimated and the three reconciled rather than averaged, in 24 to 48 hours. The first one is free.
FIN-432 Topic 2 questions, answered
Why not average the three values?
Because each approach answers a different question with different weaknesses, and an average treats them as equally reliable. For an older apartment building, income capitalization reflects how buyers actually price the asset, comparable sales confirm or challenge it, and the cost approach depends on a depreciation estimate that is hard to support. Reconciliation weighs them for this property and explains each gap, which an average cannot do.
Where does a capitalization rate come from?
Usually from the market itself: divide the net operating income of recently sold, similar properties by their sale prices. In the example the comparable sales imply about 6.5 percent. Rates differ by property type, location, age and the market's outlook, and they move over time, so a rate borrowed from a different kind of building or an earlier year imports someone else's risk and timing into the value.
Can this valuation price a building I am thinking of buying?
No. The building, rents, sales and costs were invented for a FIN-432 assignment. A real value depends on the actual property, verified income and expenses, current local sales and a licensed appraiser's judgment, and financing or purchase decisions should rest on those. The example demonstrates how the course expects three approaches to be run and reconciled.