The broker formula is a simplified form of the productive value procedure for the determination of the market value of a real estate in the context of the real estate evaluation.
The annual net profit of the real estate (gross rentals after departure of all operating and administratives expense) is divided by the capitalization interest. The capitalization interest shows yield expectation and the risk. A high capitalization interest corresponds to a high yield expectation and a high risk. Common capitalization interest rates are 4-5% with living real estates and 6-8% with trade real estates.
Mathematically the broker formula corresponds to the eternal pension.
The broker formula ignores the remainder of the useful life of the real estate and proceeds from an unlimited total service life. The determined value is tendentious too high therefore.
Example: Annual net profit 100,000 EUR/5% = 2 millions EUR.
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