Chapter 13 The Market Approach to Value

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Chapter 13The Market Approach to Value
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Major Topics

• Limitations and advantages of the market approach
  to value
• Defining a submarket of comparable property
• Selecting comparable property or comps
• Adjusting Comps towards the subject property
• Multiple Regression Applicability in Appraisal

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Market Approach

• Most common, most fundamental
• Also called Sales Comparison
• Basic Idea
• Value of RE can be determined by analyzing the
  sale prices of similar properties.
• Why?
• Because in a competitive market close
  substitutes will sell for similar prices.

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Market Approach

• Steps in the Market Approach process
• Define the submarket of comparable properties
• Screen and select the comparable properties
• Adjust the comps towards the subject property
• Develop a conclusion of value

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Defining the Submarket

• Geographic Areas
• Waterfronts Major roads School districts
• Similar zoning Similar local government
• Similar age of development
• Similar access to employment or shopping or
• entertainment

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Selecting Comparables

• Must be properties that prospective buyers would
  consider substitutes
• Must be true sales
• Must be arms-length transactions
• Select to minimize adjustments

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Adjusting the Comps

• The analyst is trying to answer the following
  question
• What would the comp sell for if it were
  identical to the subject property?
• The types of adjustments may include
• Time
• Size
• Quality
• Features and Lot Size
• Location
• Financing

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Adjusting the Comps

• Time adjustments should be made prior to feature
  adjustments, especially if the objective of the
  valuation is to derive current market value
• Size adjustments are based on units of
• comparison
• Feature adjustments are based on
• significant features within either the
• subject property or the comp
• Quality adjustments relate to the
• condition of the improvements
• Location and Views may require
• adjustments

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Market Approach

• 1. Start with sales P of comparable
• 2. Adjust for differences in attributes
• a. If Subject gt Comparable, add value of
  attribute
• b. If Comparable gt Subject, subtract value of
  attribute
• 3. Pcomparable /- Adjustments Estimate

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Market Approach

• Comparable has
• Better construction
• Less land
• Better view
• 2 years older
• Less square footage
• Adjusted price

• 150,000 selling P
• - 8,000
• 2,000
• - 5,000
• 6,000
• 3,000
• 148,000

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Market Approach

• values to use?
• Based on experience judgment
• Based on previous sales
• Regression-based appraisal
• Adjustments not based on cost of constructing
  improvements -- link

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Simple Example
Value of garage, bedrooms, age?
Real Estate Principles for the New Economy
Norman G. Miller and David M. Geltner
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Regression-Based Appraisal

• Value B0 B1 x1 B2 x2 B3 x3 Bn xn e
• Bs are constant coefficients representing dollar
  value contributed per unit of xi
• Bi may be the value of having a particular
  attribute if xi is a 0/1 attribute variable.
• xi is a feature of the structure (size, age,
  quality, location)
• http//uweb.txstate.edu/gt10/RE/mat.xls

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Market Approach

• Good?
• Uses actual market values to estimate market
  value
• Easy in active market
• Bad?
• Tough to find comparables in thin market
• Changing markets

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END