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1 Real Estate Finance and Economics for Appraisers

REAL ESTATE INVESTMENT PROFIT


This calculation is the one that real estate investors hope to utilize. It is used when a
property is sold for more than the purchase price. You better know it so that you can help
clients to determine possible returns. ☺

GROSS POTENTIAL REAL ESTATE INCOME


This one is relatively simple. We want to know what income will be realized if a property is
fully occupied and all rents are collected. We take number of units times annual rent for a
total.

Rental Vacancy and Credit Loss in Real Estate Investing


Failure to anticipate the loss of rental revenue due to vacant units and non-payment of rent
will lead to lost profitability in your clients' income producing real estate investments.
In helping clients to determine the suitability of a purchase, be sure that their due diligence
includes an estimate of vacancy and credit loss. You can be sure that most lenders will take
this into account also.

How to Calculate Rental Vacancy and Credit Loss in Real Estate Investing?
(Sample Case)
1. Determine an expected percentage of loss due to vacancy and non-payment by
checking that of comparable properties and the recent loss experienced by the
subject property.

2. Last year's vacancy and credit loss from the subject property may have been 3%
of net operating income. Other comparable properties experienced an average of
4%. Choose a value in the mix, let's say 3.60%. (professional judgment)

3. Adjust your net operating income for next year by any anticipated rent increases. If
you are anticipating a 5% increase in rent, and net operating income this year is
P44,000, then:

P44,000 X 1.05 = P46,200

4. Calculate the expected monetary loss for next year due to vacancy and credit losses:

P46,200(net operating income) X .0360 (3.6%) loss estimate = P1663.20

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Net Operating Income NOI for a Real Estate Investment Property


As a real estate professional serving investment clients, you need to be very familiar with
all the methods of valuation of income properties. One of these is the calculation of Net
Operating Income, as it is used with cap rate to determine the value of a property.

Gross Potential Income


less: Vacancy and Credit Loss
Gross Operating Income
less: Operating Expenses
Net Operating Income
Computing Net Operating Income
1. Determine the Gross Operating Income (GOI) of the property:
Assuming the GPI is P62,000 and Vacancy and Credit Loss is P10,000.

Gross Potential Income - Vacancy and Credit Loss = Gross Operating Income

2. Determine the operating expenses of the property. This would include expenses for
management, legal and accounting, insurance, janitorial, maintenance, supplies,
taxes, utilities, etc.
3. Subtract the operating expenses from the Gross Operating Income to arrive at the
Net Operating Income. Using the example of a property with a gross operating
income of P52,000 and operating expenses of P37,000, our net operating income
would be:

P52,000 - P37,000 = P15,000 Net Operating Income

Break-Even Ratio
Lenders use the break-even ratio as one of their analysis methods when considering
providing financing for a real estate investment property.
Too high of a break-even ratio is a cautionary indicator.

1. Determine the debt service for the property.


In this case we'll assume an annual debt service of P32,000
2. Determine the annual operating expenses for the property.
In this case, we'll assume that management and direct operating costs annually are
P47,000.
3. Calculate the annual gross operating income of the property.

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
3 Real Estate Finance and Economics for Appraisers

We'll assume a gross operating income of P98,000 annually.

4. Add Debt Service to Operating Expenses and divide by Operating Income:


P32,000 + P47,000 / P98,000 = .81 or an 81% Break-Even Ratio.

Debt Service
The debt service is simply how much money is owed on a loan, including both the interest
and the principal amounts.
Individuals seeking loans from banks and other lenders are often required to list
their entire debt service (the amount of all outstanding loans and financial obligations) on
an income statement (a profit and loss statement).

Cash Flow Before Taxes (CFBT) for Your Real Estate Investor Clients
When you work with real estate investor clients, it's important that you have the
knowledge to help them determine the viability of investments.
1. Begin with the Net Operating Income of the property.
2. Subtract the money out for debt service. This is the amount spent for the entire
mortgage payment, interest and principal.
3. Subtract any capital expenditures. This would be money spent for improvements on
the property, whether they are deductible that year or not. This is actual cash spent.
4. Add any loan proceeds. This is the money borrowed on a loan other than the
original mortgage. If you made capital improvements, but took out a loan to pay for
it, put that loan amount here as an addition.
5. Add any interest earned. Should the property have loans or investments out that
provide cash in as interest, add that in here.
6. You have now come to the result, which is the Cash Flow Before Taxes (CFBT) for
this property.

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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Formula:

Net Operating Income


- Subtract Debt Service
- Subtract Capital Improvements cash
out
+ Add Loan Proceeds for loans to finance
operations
+ Add back any interest earned
Cash Flow Before Taxes

After Tax Cash Flow (CFAT) for the Real Estate Investor
Cash flow after taxes isn't a difficult calculation. Once Cash Flow Before Taxes is
determined, it's a simple matter to subtract tax liability to determine Cash Flow After
Taxes.
1. Determine the cash flow before taxes.
2. Subtract the income tax liability.
3. The result is the Cash Flow After Taxes.

Another method of calculating CFAT is:

CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges

They really aren't that different, as you're just adding back cash items that were subtracted
for the Cash Flow Before Taxes calculation. In the CFBT calculation, debt service is
subtracted from Net Income, as it's a cash outflow.
However, the depreciation and interest are both deductible for taxes, and thus are added
back to get the CFAT.

Comparative formulas for Cash Flow After Tax (CFAT)


Net Income
Cash Flow BEFORE Taxes plus Depreciation
less: Tax Liabilities plus Amortization
plus Other Non Cash Charges
Cash Flow After Taxes
Cash Flow After Taxes

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
5 Real Estate Finance and Economics for Appraisers

Gross Rent Multiplier


Gross Rent Multiplier is the ratio of the price of a real estate investment to its annual rental
income before expenses such as property taxes, insurance, and even utilities for vacation
rental properties.

Other expenses could include the cost of hiring a property management company.
➢ it is the number of years the property would take to pay for itself in gross received
rent.
➢ For the investor, a higher GRM (perhaps over 10) is a poorer opportunity, whereas a
lower one (perhaps under 6) is better.
➢ The GRM is useful for comparing and selecting investment properties where
depreciation effects, periodic costs (such as property taxes and insurance) and costs
to the investor incurred by a potential renter (such as utilities and repairs) can be
expected to be uniform across the properties (either as uniform values or uniform
fractions of the gross rental income) or insignificant in comparison to gross rental
income.

Gross Rent Multiplier formula


Market Value/ Sale Price
Annual Gross Income

Commercial Lease
Commercial and retail leases use various rental pricing methods. The decision as to which
commercial lease calculation method to use is frequently related to the type of tenant
business. It could also have to do with the economy, balancing a need to retain an occupant
with their ability to pay based on their business revenues.
• Economies change, and sometimes commercial leases provide a much better
return than residential lease property.
• Investors with only residential single family rental property experience often
hesitate to get into commercial leasing, as it is more complicated. It can be well
worth the extra education however.
• Commercial rental properties include shopping malls, professional offices, strip
centers, and free-standing buildings used for offices and retail space. Successful
businesses are reluctant to change location unless more space is needed. Capturing
a good tenant in an office or retail space can mean years of dependable rental
income and positive cash flow.
• Depending on the type of lease, the tenant often pays for repairs and
improvements. They take care of the property, as they have customers on

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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site. They want them to have a pleasant experience so they'll return. There are very
different lease types, and they often are based on the type of tenant business. Let's
look at these lease types, how they work, and how they're calculated.

Commercial Lease Calculations Tools


1. Rent per square foot - Rent is set at Php xx.xx per square foot* of the leased
space.
This can be expressed either as an annual or a monthly amount (It could be on an
Annual quote or Monthly quote). *it can also be per square meter etc

2. Percentage Lease - Retail volume can vary significantly due to many factors,
including the economy and also location.

For this reason, it is a common practice for a landlord, in their commercial lease
calculation, to determine a base rent that they absolutely need, and then to have the
tenant pay a percentage of their retail gross income in addition to the base rate. This
is logical as, if the location is a good one, then retail sales should rise and enable the
tenant's ability to pay higher rent.

Minimum base rent + percentage over a certain base amount


- In this case, the tenant pays a minimum base monthly rent, and then adds a
percentage of all gross receipts over a certain base amount.

Minimum base rent + percentage of all gross receipts


- Here, we don't set bottom line revenue before the percentage kicks in.
Rent is paid on all gross receipts from zero.

Effective Rental Rate


The actual rental rate that the landlord achieves after deducting the concession value from
the base rental rate a tenant pays.

Example:
In a soft market, a landlord accepted a new tenant with a 60-month lease at P15,000 per
month but gave the new tenant 3 months free rent.

Using the average rent method, what is the effective monthly rent?

Solution:

Gross Lease = 60 months x P15K = P900,000.00


Free Rent = 3 months x P15K = 45,000.00
Net lease = 57 months x P15K = 855,000.00

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
7 Real Estate Finance and Economics for Appraisers

Effective Monthly Rent = P855K / 60mos. = P 14,250.00

REAL ESTATE FINANCING


• Real estate transfers usually involve the use of money as opposed to other assets.
• Also, most real estate acquisitions involve both the buyer's investment in the
property as well as the use of borrowed funds for the balance.
• The buyer's contribution is called equity (equity financing), whereas the borrowed
money is called a mortgage (debt financing).
• Mortgages are generally considered to be capital instruments because payback
periods are usually 10 years or more.

LOAN-TO-VALUE RATIO
A lending risk assessment ratio that financial institutions and others lenders examine
before approving a mortgage. Typically, assessments with high LTV ratios are generally
seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost
the borrower more to borrow or he or she will need to purchase mortgage insurance.

• The loan-to-value (LTV) ratio is a percentage of the original or proposed loan to the
value of a property (loan amount ÷property value)

• Mortgages are usually based on a loan-to-value concept that protects the lender
from loaning too much on a property.
• If a lender has a program that loans 70 percent LTV, and the property value is
P1,000,000, the maximum loan will be P700,000. The remaining P300,000 is
derived from a down payment (equity) or some form of other financing.

The Five Types of Assets


❑ Common stocks – ownership of businesses
❑ Preferred stocks – special types of stock that often pay high dividends but have
limited upside
❑ Bonds – corporate bonds, municipal bonds, savings bonds, treasury bonds, etc.
❑ Money markets – highly liquid funds that are designed to protect your purchasing
power; considered to be a cash equivalent
❑ Real estate investment trusts or REITs – a special type of company designation
that allows no taxation at the company level provided more than 90% of earnings
are paid out to the shareholders. The assets are often invested in a variety of real
estate projects and properties.

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❑ Mutual funds including exchange-traded funds, index funds, and actively managed
funds.

Return on equity for Real Estate Investment, First year


Many real estate investors are involved in multiple properties and use leverage in their
purchases.
When deciding on the viability of an investment, one of the measures used is the expected
Return on Equity in the first year.

If two properties are similar, the one which will produce the best first year return may
be the better short term investment.

Formula of ROE on First year

Cash Flow After Taxes


Cash paid on the First Year
If in case you are evaluating profitability of 2 or more investment property, you can choose to evaluate
its ability to easily earn income (the fastest) by referring to First year ROE.

Return on equity for Real Estate Investment, Subsequent Year


Apart from calculating the first year return on equity, a real estate investor might want to
know their return on equity as projected for future years or as experienced after the first
year.
This could be important; as once the property has appreciated and the mortgage has
been paid down somewhat, the amount of equity invested at that point might be better
used elsewhere if current return on equity is low.

Formula of ROE on Subsequent Year

*Mortgage Payoff is the remaining


Cash Flow After Taxes mortgage balance that is needed to be
settled
(Projected Value less Mortgage Payoff) * Projected Value or Current Value

ROE could be used to evaluate desire to still maintain or dispose investments.


You can compare it with the prevailing rate,
if it is equal or greater, retain.
If lower, rather dispose it and look for a new investment.

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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Capitalization Rate
The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income
(NOI) to property asset value.
Capitalization Rate is the required rate of return the investor expects from the investment.

How is Capitalization Rate Used by Real Estate Investors?


✓ Use capitalization rate to determine value of a property from the income stream.
✓ Determine the required income to justify a purchase price.
✓ Compare one investment from another.

Exchange of Assets (Non-current)


PAS 16 defines Property Plant and Equipment (PPE) as follows:
“ PPE are tangible assets that are held for use in production or supply of goods or services,
for rental to others, or for administrative purposes, and are expected to be used during
more than one period.”

Types of Acquisition of Property


▪ Cash Basis
▪ On Account (subject to cash discount)
▪ Installment basis
▪ Issuance of Share Capital
▪ Issuance of Bonds Payable
▪ Exchange
▪ Donation
▪ Government Grant
▪ Construction
EXCHANGE
PAS 16 provides that “the cost of an item of property, plant and equipment acquired in
exchange for a nonmonetary asset or a combination of monetary and nonmonetary asset is
measured at fair value, unless the exchange transaction lacks commercial substance.”
Accordingly, any gain or loss on the exchange is fully recognized.

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Types of Exchange
A. Exchange, NO CASH involved
I. FMV of Asset given
II. FMV of Asset received
III. Carrying Amount of Asset given

Illustration:
Girlie has a machinery with carrying amount of P500,000 is exchanged for an equipment
with a FMV of P550,000. At the time of exchange, the machinery has a FMV of P530,000.
What would be the value recorded for the equipment acquired from the exchange?

B. Exchange, CASH is involved


In accordance with PAS 16, if a property is acquired in an exchange and there is cash
involved or monetary consideration, the cost of property is equal to the ff:
I. FMV of Asset Given plus cash payment (on the part of payor)
II. FMV of Asset Given minus the cash received (on the part of recipient)

Illustration:
OLX Greenhills Co. exchanged equipment in its manufacturing operations plus P5,000.00 in
cash for similar equipment in the operation of Tutuban Center Co. The following
information pertains to the exchange:

OLX Tutuban
Equipment (Cost) P48,000.00 P44,000.00
Accumulated Depreciation P40,000.00 P10,000.00
Net Book Value* __________ __________
Fair Value of Equipment P20,000.00 P25,000.00
Cash Given Up P 5,000.00

1. What is the cost of the new equipment on the books of OLX Greenhills Co.?
2. What is the gain (loss) in the books of OLX Greenhills Co.?
3. What is the cost of the new equipment on the book of Tutuban Center Co.?
4. What is the gain (loss) on the books of Tutuban Center Co?

Depreciation
✓ is the systematic allocation of the cost of the depreciable amount over its useful life.
✓ It is the periodic allocation of the cost of a tangible asset over the asset’s estimated
useful life.

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✓ Physical deterioration and obsolescence are major factors in limiting a depreciable


asset’s useful life.

Acquisition Cost
Less: Estimated Salvage value
Acqui25,000
s5,000ition Cost
Depreciable Cost Less:20,000
Accumulated Depreciation
Divided by: Estimated Useful Life 5
Depreciation per Period Net4,000
Book Value
Factors in Computing Depreciation
Acquisition Cost/ Original Cost/ Historical Cost- the net purchase price of an asset plus
all reasonable and necessary expenditures to get it in place and ready for use.

Salvage/Residual /Scrap Value- is the proportion of an asset acquisition cost a company


expects to recover when it disposes of the asset.

Depreciable cost- is an asset’s cost less its residual value

Useful life – is either the period over which an asset is expected to be available for use by
the entity, or the number of production or similar units expected to be obtained from the
asset by the entity.

Depreciation Period
Start: when it is available for use.
End: when asset is derecognized.
(not yet end if became idle only)

Methods of Depreciation
1. Equal or Uniform Charge Methods
Straight-line Method ☺
Composite Depreciation
Group Depreciation

2. Variable Charge or Use-Factor Method


Working hours or Service Hours
Units-of-Production Method

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3. Decreasing Charge or Accelerated or Diminishing Balance


Sum-of-Years Digits Method (SYD)
Declining Balance Method
Double Declining Balance Method

4. Other Methods
Inventory or Appraisal Method
Retirement Method
Replacement Method

Straight-line Method
Straight-line depreciation is the simplest and most often used method.
In this method, the company estimates the salvage value of the asset at the end of the
period during which it will be used to generate revenues (useful life).

Illustration:
A machine that has an estimated useful life of 5 years is purchased at a cost of 25,000 and
will have a salvage value of 5,000.

Acquisition Cost 25,000


Less: Estimated Salvage value 5,000
Depreciable Cost 20,000
Divided by: Estimated Useful Life 5
Depreciation per Period 4,000

Sample Problem
Good Year Co. has a building with Acquisition Cost of P15,500,000 and has an estimated
useful life of 50 years.
The building has estimated salvage value of P500,000.
1. What is the depreciation expense of the building after one year?
a. P310,000
b. P300,000
c. P14,700,000
d. P15,200,0000

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2. What is the Accumulated depreciation of the building after two years?


a. P620,000
b. P600,000
c. P14,900,000
d. P15,200,0000

3. What is the Net Book Value of the building after two years?
a. P620,000
b. P600,000
c. P14,900,000
d. P15,200,0000

Age of Asset
= Accumulated Depreciation * Original Life
Original Cost
Illustration:
A machinery costing P500,000 had been appraised at P1,000,000. The accumulated
depreciation on cost is P200,000. The original life of the asset is 10 years.
What is the age of the asset at the time of the appraisal?

Appreciation of Asset

Appreciation, in general terms, is an increase in the value of an asset over time. The
increase can occur for a number of reasons, including increased demand or weakening
supply, or as a result of changes in inflation or interest rates. This is the opposite
of depreciation, which is a decrease over time.

Illustration:
A machinery costing P500,000 had been appraised at P1,000,000. The accumulated
depreciation on cost is P200,000. The original life of the asset is 10 years.
What is the amount of annual appreciation that should be reported in the income
statement subsequent to the appraisal?

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Time Value of Money


A peso today is worth more than a peso a year from now. Therefore, investments that
promise earlier returns are preferable to those that promise later returns.

SIMPLE INTEREST

Simple interest is the amount of interest paid based solely on the original
amount lent or borrowed.

The formula for simple interest is given by:

I=P x r x n
Where
I = interest
P = principal, present amount, capital
F = future amount, maturity value
r = rate of simple interest expressed in decimal form
n = time in years

The future amount is


F=P+I
F=P+Prn
F=P(1+rn)

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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Simple Interest (Sample Problem)

If P5,000 were loaned for five years at a Simple interest rate of 7% per year,
what would be the future value?

Given: Solution:
P= $5,000 F=P(1+rn)
r= 0.07 F=$5000(1+ 0.07 x 5 )
n= 5 years
F = $6,750.00
COMPOUND INTEREST
Compound interest is interest that is paid on both the principal and also on any
interest from past years. It’s often used when someone reinvests any interest they gained
back into the original investment

Compounding of Interest Formula

The Future Value in compound interest is:


n
FV=PV(1+r)

Where

PV = principal, present amount, capital


FV = future amount
r = rate of compound interest expressed in decimal
form

n = time in years/ number of period


m = compounding per period

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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OR

Values of m
Annually 1
semi-annual 2
Quarterly 4
bi-monthly 6
monthly 12

Compound Interest (Comparative Problem to Simple Interest)

If P5,000 were loaned for five years at a Compound interest rate of 7% per year,
what would be the future value?

Given: Solution:
P= $5,000 F=P(1+r)n
r= 0.07 F=$5000(1+0.07)5
n= 5 years
F = $7012.75
Compound Interest (Sample Problem)
If I will invest my P1,000 and the prevailing interest rate is 10%, the interest
will be compounded semi-annually for 3 years.

Given: Required:
P= $1,000 n= 3 years
r= 0.10 m= 2 F= ?

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Present Value
• The current worth of a future sum of money or stream of cash flows given a
specified rate of return.
• Also referred to as "discounted value".
• Calculating present value is called discounting.

Relationship of Present and Future Value

PRESENT VALUE CONCEPTS


A peso today is worth more than a peso a year from now because a peso
received today can be invested, yielding more than a peso a year from now.

Present Value of 1 formula


where:
PV- present value
FV- future value
i- interest rate
Or n- period

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
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Or

Where

PV = principal, present amount, capital


FV = future amount
r = rate of compound interest expressed in decimal form
n = time in years/ number of period
m = compounding per period
Sample Problems
Problem 1 (Present Value of 1)
Let's assume we are to receive P100 at the
end of two years. How do we calculate the
present value of the amount, assuming the
interest rate is 8% per year compounded
annually?

Problem 2 (Present Value of 1)


What is the present value of receiving
a single amount of P5,000 at the end
of three years, if the time value of
money is 8% per year,
compounded quarterly?
*Notice that the solution shows n = 12, because there are 12
quarters in the three-year period. Because the time periods
are three months long, the rate for discounting is i = 2%
(the quarterly rate that results from the annual rate of 8%
divided by the four quarters in each year).

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Present Value of Ordinary Annuity formula

where:
i = Interest rate per compounding period
n = The number of compounding periods
R = Fixed periodic payment

What Are Annuities?


Annuities are essentially a series of fixed payments required from you or paid to you at
a specified frequency over the course of a fixed time period.

The most common payment frequencies are yearly, semi-annually (twice a year), quarterly
and monthly. There are two basic types of annuities: ordinary annuities and annuities due.

• Ordinary Annuity: Payments are required at the end of each period. For example,
straight bonds usually pay coupon payments at the end of every six months until the
bond's maturity date.
• Annuity Due: Payments are required at the beginning of each period. Rent is an
example of annuity due. You are usually required to pay rent when you first move in
at the beginning of the month, and then on the first of each month thereafter.

Present Value of an Ordinary Annuity (PVOA)


Ordinary annuities are also known as annuities in arrears.
These annuities are characterized by recurring, identical, cash payment amounts
(payments, receipts, rents) at the end of each equal period.

Problem 3 (PVOA)
Let's assume we are to receive P100 at the end of each year for two years. How do we
calculate the present value of this annuity, assuming the interest rate or the required rate
for discounting is 8% per year compounded annually?

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Problem 4 (PVOA)
How much should an investor pay today to be assured of earning of 6% with
an investment of Php 500,000 per year for 6 years considering a factor of
4.917324?

A) Php 2,458,662 C) Php 1,694,688


B) Php 1,016,813 D) Php 2,016,312

Future Value
Future value is what a dollar today will be worth in the future.
This is because of the interest that dollar can earn over time, therefore making it more
valuable in the future.

Problem 5 (Future Value of 1)

You make a single deposit of P100 today. It will remain invested for 4 years at 8% per
year compounded annually.
What will be the future value of your single deposit at the end of 4 years?

Answer is: P136.04 or P136

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
21 Real Estate Finance and Economics for Appraisers

Mean Median Mode

Mean, median, and mode are three kinds of "averages". There are many "averages" in
statistics, but these are, I think, the three most common.

The "mean" is the "average" you're used to, where you add up all the numbers and
then divide by the number of numbers.

The "median" is the "middle" value in the list of numbers. To find the median, your
numbers have to be listed in numerical order, so you may have to rewrite your list first.

The "mode" is the value that occurs most often. If no number is repeated, then there is
no mode for the list.

The "range" is just the difference between the largest and smallest values.

Exercise 1:

Find the mean, median, mode, and range for the following list of values:

13, 18, 13, 14, 13, 16, 14, 21, 13

The mean is the usual average, so:

(13 + 18 + 13 + 14 + 13 + 16 + 14 + 21 + 13) ÷ 9 = 15

Note that the mean isn't a value from the original list. This is a common result. You
should not assume that your mean will be one of your original numbers.

The median is the middle value, so I'll have to rewrite the list in order:

13, 13, 13, 13, 14, 14, 16, 18, 21

There are nine numbers in the list, so the middle one will be the (9 + 1) ÷ 2 = 10 ÷ 2 =
5th number:

13, 13, 13, 13, 14, 14, 16, 18, 21

So the median is 14

Note: The formula for the place to find the median is "( [the number of data points] + 1)
÷ 2", but you don't have to use this formula. You can just count in from both ends of the
list until you meet in the middle, if you prefer. Either way will work. ☺

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
22 Real Estate Finance and Economics for Appraisers

The mode is the number that is repeated more often than any other, so 13 is the
mode.

The largest value in the list is 21, and the smallest is 13, so the range is 21 – 13 = 8.

Exercise 2:

Find the mean, median, mode, and range for the following list of values:

1, 2, 4, 7

The mean is the usual average:

(1 + 2 + 4 + 7) ÷ 4 = 14 ÷ 4 = 3.5

Note: The list values were whole numbers, but the mean was a decimal value. Getting a
decimal value for the mean (or for the median, if you have an even number of data
points) is perfectly okay; don't round your answers to try to match the format of the other
numbers.

The median is the middle number. In this example, the numbers are already listed in
numerical order, so I don't have to rewrite the list.

But there is no "middle" number, because there are an even number of numbers. In
this case, the median is the mean (the usual average) of the middle two values:

(2 + 4) ÷ 2 = 6 ÷ 2 = 3

The mode is the number that is repeated most often, but all the numbers in this list
appear only once, so there is no mode.

The largest value in the list is 7, the smallest is 1, and their difference is 6, so the range
is 6.

❖ About the only hard part of finding the mean, median, and mode is keeping
straight which "average" is which.
❖ Just remember the following:

▪ mean: regular meaning of "average"


▪ median: middle value
▪ mode: most often

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
23 Real Estate Finance and Economics for Appraisers

THE PERCENTAGE FORMULA


The principle Percentage = Base x Rate is used in many business problems.

The difference between percent and percentage


Percentage, P, is always a number without a percent sign.
Part of the whole (of the Base).

Rate, R, (percent) is usually a number followed by percent sign.

Base, B, is the whole number


To help us solve for missing component, the “pyramid” technique is provided.

As a practice, let us try to distinguish the base, percentage and rate;

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA
24 Real Estate Finance and Economics for Appraisers

Problem 1: Finding PERCENTAGE


A discount of 23% is offered on a desk costing P374. How much is the discount? The two
knowns are the rate, R, which is 23%, and the base, B, P374.
The unknown is the percentage, P.

P = RB
P = 23% x P374
P = P86.02

Problem 2: Finding RATE


A loss of P34 was sustained on the sale of a desk calculator that cost P520.
R= P/B
R= P34/ P520
R= 0.065384 or 6.54%

Problem 3: Finding BASE


Romeo received a salary increase of P165, which was a 15% raise.
What was his original salary? ________
B= P/R
B= P165/ 0.15
B= P1,100

Prepared by:
Ms. Edita Mara Lacsamana, JD, CPA, MBA, REB, REA
Contact details:
editalacsamana@gmail.com
University of Santo Tomas
Alfredo M. Velayo College of Accountancy

PREVAIL Inc. Ms. Edita Mara Lacsamana, JD, CPA ,MBA, REB, REA

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