Chapter 4 - Valuation and Market Analysis

Chapter 4 - Valuation and Market Analysis


  • Appraisal terms 

    • Appraisal - an estimate (opinion) of value

    • Purpose of an appraisal

      • Function of an appraisal

      • Many types of value, the type of value depends on the purpose/function of an appraisal

    • Market value

      • Most probable price in a competitive and open market

      • Under condition of a fair sale with buyer/seller acting knowledgeable and prudently

    • Price

      • What one paid for “something”

      • Much different than “value”, which is what oe would be willing to pay for “something”

    • Comparative market analysis (CMA)

      • Uses the sales comparison approach to establish value

      • Term used by real estate agents to describe market value of a property 

    • * MAI: member of the appraisal institute 

    • * USPAP: uniform standard of professional appraisal practice 

    • Market value and market price 

      • Market price is what one paid to add a garage

      • Market value is what a typical buyer would be willing to pay to have a garage before they opt for a property with no garage

    • Value 

      • * characteristic/element of value (DUST)

        • Demand - how many buyers are seeking this property?

        • * utility - does the property have everything a buyer wants?

        • Scarcity - is there enough supply for all buyers?

        • Transferability - can a seller convey title to a buyer?

  • Economic principles of value

    • Supply and demand 

      • Many homes for sale and few buyers will decrease value

      • Few homes for sale and many buyers will increase value 

    • Highest and best use

      • The first step in determining value

      • When determining current market value;

        • A property can only be appraised according to how it is currently being used

        • Cannot appraise a property for what it could be used for

    • Substitution 

      • Used by real estate agents to determine market value

      • Using properties that are similar which have recently sold to determine market value

    • Contribution

      • Determine elements that contribute to value of some properties which other properties do not benefit from

        • Ex: community pool, clubhouse, playground, etc.

  • Value 

    • Economic principles of value

      • Change

        • The only constant is change

        • Value today can change tomorrow 

      • * Conformity 

        • Never out build the neighborhood

        • Large homes surrounded by smaller homes will suffer from regression *

        • Small homes surrounded by large homes will benefit from progression *

      • Anticipation of value

        • Present worth of anticipated future benefits

        • Used primarily with income producing properties

      • Competition

        • Works much like supply and demand

        • If several similar properties are for sell in the same area, competition will drive down prices

      • * plottage

        • The increase in value resulting from consolidating two or more adjacent lots into one larger lot 

  • Influences on value

    • Social focus - appraisers consider things such as:

      • Marriage rates

      • Divorce rates

      • Birth rates

      • Death rates

    • Economic forces - what is the economy doing to affect value?

    • Political forces

      • What the government is doing to affect value

    • Physical forces - appraiser considers such things as:

      • Primarily rental property or owner occupied?

      • Primarily low income or high income?

  • Approaches to value 

    • * sales comparison approach 

      • Most useful way for a broker to assist a seller determine sales price

    • Income approach

      • Must be an income producing property 

    • Cost approach 

      • Method of estimating the buildings replacement cost

    • * sales comparison approach

      • Types of properties

      • Market comparison

      • Make adjustments for differences such as:

        • Time of sale

        • Location

        • Physical characteristics 

        • Sales concessions 

Subject                                       Comp 1                               Comp 2                                               Comp 3

3 BR                                           3 BR                                    3 BR                                                    3BR

2 BA                                           2BA                                     1 ½ BA (½ BA = $1,500)                     2 ½ BA

1400 SF ($30 per foot)              1425 SF                               1375 SF                                              1475 SF

                                                  $115,000                              $109,000                                             $120,000


Adjustments                            - $ (750) SF                          +$750                                                  -$2,2500

                                                                                             +$ (1,500) Bath                                   -$1,500

Adjusted sales price                 $114,250                               $111,250                                             $116,250


  • Income approach to value

    • Used for income prodicing properu

    • Two method to the income approach

      • * capitaliaszation approach (best for commercial)

      • * gross rent multiplier (best for residential)




  • Capitalization approach


Sub                     comp

NOI = $73,400                   NOI = $87,200

     CAP = 11%                         Value = $825,000

                                                       Value = $667,272…                CAP = 11%

  • Gross rent multiplier (GRM) approach

Sales price

Monthly gross income (rent) = GRM

Monthly gross income (rent) * GRM =estimated value

Subj                                   Comp

Rent = $900                 Value = $85,000

GRM = 103                  GRM = 103

Value = $92,700           rent = $825

  • Approaches to value

    • * cost approach

      • Method of estimating the buildings replacement cost

    • 5 steps

      • Estimate value of the land (cannot depreciate)

      • Estimate replacement or reproduction cost

      • Estimate accrued depreciation (economic life)

      • Subtract estimated depreciation from cost new

      • Add depreciated value to the land value 

  • Types of depreciation

    • Physical deterioration

      • Normal wear and tear

    • Functional obsolescence

      • Something that may have been normal when built but may not be very functional today

    • External obsolescence

      • Something external to the property that will depreciate value

      • Such as:

        • Property underneath the runway of an airport

        • Property located next to a railroad track

        • Property located next to a interstate

        • Poorly maintained property next door or nearby

    • Curable and incurable

      • Curable 

        • Forms of depreciation that can be cured such as physical deterioration or functional obsolescence 

      • Incurable

        • Forms of depreciation that cannot be cured such as external obsolescence 

  • * comparative market analysis (CMA)

    • Used by real estate agents

    • Utilize the sale comparison approach

    • Mist make adjustments to sales prices of similar properties that have recently sold

    • data/information is available to agents via the multiple listing service (MLS)

    • If no similar or comparable properties exist, agents should seek help from an appraiser

    • Similar terms and use

      • * broker price opinion (BPO)

      • Broker opinion of value (BOV)

      • Convicted by real estate agents for banks. Much cheaper for the bank to hire a real estate agent to do a BPO/BOV rather than pay an appraiser to do an appraisal

      • If doing a BPO, the lender would be your client 

  • The appraisal process

    • Define the problem

    • Preliminary survey and appraisal plan of action

    • Collect data

    • Analyze and process data collected 

    • Application of three approaches to value

    • Correlation of final estimate

  • * reconciliation

    • Process of appraiser using all three approaches to value in estimating value

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