Unlocking Property Value: The Comprehensive Guide to the Ellwood Technique
Introduction to the Ellwood Technique
The Ellwood Technique is a proven approach in the appraisal of mortgaged income properties. This technique goes beyond simple estimates, utilizing detailed calculations to provide a present value for properties by considering expected annual cash flows and future resale proceeds.
How it Works
The technique requires an appraiser to determine the annual cash flow to the equity owner and the anticipated proceeds from the eventual resale of the property. These future cash inflows are then discounted to their present value using a specified equity yield rate. Finally, these present values are consolidated to derive the total equity value, which is then added to the remaining mortgage balance. The summation provides a property value estimate that is both comprehensive and accurate.
Excel with Ellwood Capitalization Rate Tables
The technique highlights the use of Ellwood Capitalization Rate tables, developed by the late L.W. Ellwood, which streamline and speed up the calculation process by providing ready-to-use conversion factors.
Real-World Example
Let’s delve into a practical example to illustrate the Ellwood Technique:
An equity owner anticipates receiving $10,000 of annual cash flow for a period of 10 years, followed by a $100,000 payment upon resale. The property currently holds a $500,000 mortgage. By using a 12% equity yield rate and referring to Ellwood’s Table, we achieve the following:
| Year | Annual Cash Flow | Discount Factor (12%) | Present Value |
|---|---|---|---|
| 1 | $10,000 | 0.8929 | $8929 |
| 2 | $10,000 | 0.7972 | $7972 |
| 3 | $10,000 | 0.7118 | $7118 |
| … | … | … | … |
| 10 | $10,000 | 0.3217 | $3217 |
Adding the resale proceeds after 10 years:
| Resale | $100,000 | 0.3217 | $32,170 |
Adding these present values provide the total present value, which when added to the mortgage balance offers an accurate estimation of the property value.
Frequently Asked Questions (FAQs)
Q: What is the main advantage of using the Ellwood Technique?
A: The Ellwood Technique provides a more precise property value estimate through the consideration of both cash flows and resale proceeds, offering a comprehensive evaluation.
Q: What are Ellwood Capitalization Rate tables?
A: These are pre-calculated tables developed by L.W. Ellwood that provide necessary conversion factors, making the calculation process faster and more efficient.
Q: What is an equity yield rate?
A: It is the return rate expected by an equity investor, used in discounting future cash flows to their present value.
Q: Could you give another example of when to use the Ellwood Technique?
A: Certainly! If another property is projected to generate annual cash flows of $50,000 for 15 years and resale proceeds of $750,000 with a mortgage of $2 million, these figures can be plugged into the Ellwood Technique table with an appropriate discount rate to estimate its present value.
Conclusion
By integrating expected cash flows and thoughtful discounting, the Ellwood Technique stands out as a robust method for income property appraisal, ensuring accurate and reliable valuation results in real estate investments.
Related Terms: Capitalization Rate, Equity Yield Rate, Property Appraisal, Discounted Cash Flow Analysis.
