Answer:
The relationship between an overall cap rate extracted from sales comparables and the overall cap rate developed with the debt coverage ratio model can vary depending on market conditions and property-specific factors.
Step-by-step explanation:
1. Similarity: In some cases, the overall cap rate extracted from sales comparables and the overall cap rate developed with the debt coverage ratio model can be similar. This indicates that the market value derived from the sales comparables aligns with the market value derived from the property's income-generating potential. It suggests that both models are providing consistent estimates of the property's value.
2. Disparity: However, there can also be a disparity between the two cap rates. This can occur due to several factors:
a. Market Variations: Market conditions, such as fluctuations in demand and supply, can impact the overall cap rate extracted from sales comparables. If the market is experiencing a high demand for properties, it can drive up prices and result in a lower overall cap rate from sales comparables compared to the overall cap rate developed with the debt coverage ratio model.
b. Property-Specific Factors: The condition and unique characteristics of the property can affect the cap rates. If a property has significant value-add potential or is in a prime location, it may have a higher overall cap rate from sales comparables compared to the overall cap rate developed with the debt coverage ratio model.
3. Interpretation: When there is a disparity between the two cap rates, it is crucial to consider the underlying reasons and analyze them in conjunction with other valuation methods. For example, if the overall cap rate from sales comparables is significantly lower than the overall cap rate developed with the debt coverage ratio model, it might indicate that the property is overvalued in the market or that the sales comparables used are not truly comparable.