Coming Soon More Training and Practice Problems For The Purdy's Method

We have created these training problems so people can practice the Purdy's Method effectively.  We will work to develop practice scenarios so you can learn to use Purdy’s Method in more effectively.  For many, this may be the tool that gets them into or out of commercial real estate.  Most importantly, we are one step closer to having a standardized method of commercial land valuation that every one can use and understand.

The Purdy's Method site is a free non profit site and therefore it takes time to add new training, so if you would like to submit your own training scenario please submit it by leaving your contact information within the contact us page or emailing the webmaster. 

NEW

Training  1

Check This Out

Purdy's Quickie Land Evaluation

Take the market rent for the type of space that best fits the property.   Then divide that market rent by a developer cap of 10%.  Then subtract the cost of construction for that type of space.  Then multiply that number by the land coverage ration, (LCR) or floor area ration, (FAR).  (LCR is used for singlestory buildings, and FAR is used for multistory)  That number is the per SF value of the land. Simply multiply that number by the total SF of land in the property and you will have an estimated value.

Sample:

Market Rent $22.00 ÷ Developer Cap 10% - Construction Cost Per SF $110.00 x LCR or FAR 20%, = Value Per SF $22 x Total Land 43,560  SF = Total Land Value $958,320

($22 ÷ 10% - $110 x 20% = $22 ) ($22 x 43,560 = $958,320)

Understanding Cap Rates

The cap rate also know as Income Capitalization Rate is often confused with the return on investment, when in all actuality it is simple a measurement tool used to compare two or more investments. This tool has been most commonly used in the popular IRV formula as demonstrated below. With any of the two of the number in the formula, you can determine the third. 

So if you have a $100,000 NOI and a 10% Rate your Value is $1,000,000.  ($100,000 / 10% = $1,000,000) or if you have a $1,000,000 building at a 8% Rate the NOI would be $80,000 ($1,000,000 x 8% =$80,000) or if the NOI is $75,000 and the Price of the Building is $1,000,000 the Rate would be 7.5% ($75,000 / $1,000,000= 7.5%).

Simple enough, but where do cap rates come from? Well the answer is a simple. They are usually based off a stable and safe benchmark. Typically they run 150 to 200 basis points over the 10 year average of the Muni Bond. In one sense it is a way to mitigate risk. Consider that the Muni bond has little to no risk so it only makes sense to make more on something that has risk like real estate. Obviously the more stable the property the lower the cap rate. So a property that has a Starbucks is going to trade at a much lower cap rate than a property that has Mom and Paw's Coffee House.

      NOI

       ÷

Rate  X   Value