IRV and the capitalization rate
“What is the IRV useful for?” — asked in class, and it is the right question. Most students memorize the triangle without ever learning what it answers.
IRV values an income-producing property. Not a house somebody lives in — a building that produces rent. It answers one question: given what this property earns and what return an investor demands, what is it worth?
Three letters, three positions. I is income, and on the exam that means net operating income for a year. R is the capitalization rate, written as a decimal. V is value. Cover the one you want and the triangle tells you what to do with the other two.
Worked, twice
Income of $5,000 and a rate of 2 percent. 5,000 ÷ 0.02 = $250,000. Nine students in one class got that inside eleven seconds, which tells you it is not hard once the setup is automatic.
Rent of $5,000 a month at a cap rate of 3.5 percent. First turn the month into a year: 5,000 × 12 = 60,000. Then 60,000 ÷ 0.035 = $1,714,285.71.
The trap: the question gives you a monthly figure and the rate is annual. If your answer is exactly twelve times too small, this is what happened. Read the question for the word month before you touch the calculator.
Loan to value, and which number the lender uses
Loan to value is the loan divided by the value. The whole difficulty is the word value, because the exam gives you two numbers that both look like the value and only one of them counts.
The lender lends against the lower of the two. Always. If the appraisal comes in above the price, the lender does not hand you the difference — the bank has no interest in lending you money against a bargain you already got. If the appraisal comes in below the price, the bank lends on the appraisal and you find the rest.
Worked
A $400,000 loan. Purchase price $500,000. Appraised value $600,000. The value is the lesser of the two, so it is $500,000, and 400,000 ÷ 500,000 = 80 percent.
The trap: reaching for $600,000 because it is the appraisal, or because it is the bigger number and a bigger denominator gives a friendlier ratio. That gives 66.7 percent and it is wrong. This question is on the exam precisely because the intuitive answer is the wrong one.
Commission
Price times rate. The arithmetic is the easy part; the exam makes it interesting by splitting the result two or three ways before it asks what you personally take home.
Worked
$3,000,000 × 6 percent = $180,000 in total commission.
Now split it. Half to the listing side and half to the selling side leaves $90,000 on each side. If your broker splits that with you sixty-forty in your favor, you take $54,000 and the brokerage keeps $36,000.
The trap: answering with the total when the question asked for the agent’s share, or splitting once when the question describes two splits. Underline what is actually being asked before you start.
Acreage and land measurement
There is nothing to understand here. These are conversions, and the exam expects you to know them cold.
Forty-three thousand five hundred and sixty is the number to memorize. Everything else on this topic falls out of it. A parcel of 87,120 square feet is two acres, and you get there by dividing.
The trap: a question that gives you dimensions in feet and asks for the answer in acres, or the reverse. Convert first, then answer.
Area
Irregular lots are the only wrinkle, and the method is always the same: cut the shape into rectangles and triangles, work out each piece, add them up. Draw it. Nobody has ever lost points for sketching the lot in the margin.
Check your work
Two calculators. The second one is the more useful of the pair, because it names which value it used and that is the whole lesson.
IRV
Enter the annual income. If you have a monthly figure, multiply it by twelve first — the calculator will not do it for you, and neither will the exam.
Loan to value
Watch the second box. It shows you which of your two numbers the lender is actually lending against, and it is always the lower one.