Area and Valuation Calculations
Real estate math shows up on every exam. These calculations are used to measure property size, estimate value, and evaluate investment performance.
Area and Acreage Basics
Common conversions:
- 1 square foot = 12 inches x 12 inches
- 1 acre = 43,560 square feet
- 1 section = 640 acres
Square Footage Example
A room is 12 feet by 15 feet.
Square footage = 12 x 15 = 180 sq ft
Acreage Example
A parcel is 217,800 square feet.
Acres = 217,800 / 43,560 = 5 acres
Irregular Lots
If a lot is L-shaped, split it into rectangles, calculate each area, and add them together. This is a common exam strategy.
CMA and Listing Price
A Comparative Market Analysis (CMA) compares recent sales to estimate value. The common process is:
- Select comparable sales.
- Adjust for differences.
- Average adjusted prices.
CMA Adjustment Rule
Adjust the comparable, not the subject.
Example:
- Subject has a garage, comp does not.
- Garage value = $8,000.
- Adjusted comp price = comp price + $8,000.
This keeps all comps aligned with the subject for averaging.
Net Operating Income (NOI)
NOI is the income a property generates after operating expenses, excluding mortgage payments.
Formula:
NOI = Gross Income - Operating Expenses
NOI Example
Gross income = $60,000 Operating expenses = $20,000
NOI = $40,000
Capitalization Rate
Cap rate measures return and is used to value income property.
Formula:
Cap Rate = NOI / Value
Value = NOI / Cap Rate
Cap Rate Example
NOI = $40,000 Cap rate = 8 percent
Value = $40,000 / 0.08 = $500,000
Cap Rate Interpretation
A higher cap rate means higher risk and lower value. A lower cap rate means lower risk and higher value. If interest rates rise, cap rates often rise and values can fall.
Equity in Property
Equity = Market Value - Loan Balance
Example:
Market value = $400,000 Loan balance = $310,000
Equity = $90,000
Assessed Value and Property Taxes
Property taxes are based on assessed value.
Tax = Assessed Value x Tax Rate
Example:
Assessed value = $300,000 Tax rate = 1.25 percent
Tax = $300,000 x 0.0125 = $3,750
Quick Formula Sheet
Table: Quick Formula Sheet
| Concept | Formula |
|---|---|
| Square footage | Length x Width |
| Acreage | Sq ft / 43,560 |
| NOI | Gross Income - Operating Expenses |
| Cap rate | NOI / Value |
| Value (income) | NOI / Cap Rate |
| Equity | Market Value - Loan Balance |
| Property tax | Assessed Value x Tax Rate |
Additional Practice
Area and Acreage Practice
A rectangular lot is 120 feet by 200 feet. Square footage = 24,000. Acres = 24,000 / 43,560 = 0.55 acres (rounded).
If a lot is 2.5 acres, square footage = 2.5 x 43,560 = 108,900 sq ft.
Value and Cap Rate Practice
If NOI is $54,000 and the cap rate is 9 percent, value = $54,000 / 0.09 = $600,000.
If value is $500,000 and NOI is $35,000, cap rate = $35,000 / $500,000 = 7 percent.
Exam Application Check
If a question asks for value using cap rate, divide NOI by the cap rate. If it asks for cap rate, divide NOI by value. If it asks for acreage, divide square footage by 43,560.
CMA Adjustment Practice
Subject property has 3 bedrooms and 2 baths. A comp has 2 bedrooms and 2 baths and sold for $380,000. If a bedroom adjustment is $12,000, the adjusted comp value is $392,000.
If another comp sold for $405,000 but has a newer roof worth $6,000, subtract $6,000 to match the subject.
Listing Price Strategy
Agents often use a price range based on adjusted comps rather than a single number. The goal is to position the listing within current market activity and create competition rather than overpricing.
Exam Application Check
If a question asks whether you add or subtract adjustments, remember you adjust the comp to match the subject.
Measurement Tips and Rounding
Most exam questions accept simple rounding. If you calculate 0.55 acres, it is acceptable to round to 0.6 acres if the answers are broad. Always check the answer choices and round accordingly.
If the question specifies 360 days or 365 days, use that value. Many real estate proration problems use a 360-day year, so pay attention to the instructions.
Exam Application Check
If a question provides a formula or a day-count convention, follow it exactly. Do not assume 360 or 365 without guidance.
Assessed Value vs. Market Value
Assessed value is used for taxes and may lag the market. A property can sell for $420,000 while the assessed value is $300,000. Tax calculations use assessed value, not sale price.
If a question asks why tax bills differ from sale price, the answer is that assessments are based on local rules and timing, not current market value.
Exam Application Check
If the question mentions a mill rate or assessment ratio, use assessed value to compute taxes.
How many square feet are in one acre?
NOI is calculated as:
If NOI is $30,000 and the cap rate is 10 percent, the value is:
Equity is best defined as:
8.2 Commission and Financing Costs
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