chapter 13 the market approach to value

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

Chapter 13

The Market Approach to Value


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 Confidence Ranges and Appraised Values Multiple Regression Applicability in

Appraisal


Introduction

The Market Approach is in many respects, the most fundamental and important of the three traditional approaches to valuation

Definition: An approach to estimating market value of a subject property by means of examining the transaction prices of recent sales of properties similar to the subject property in the same or similar real estate asset market


Introduction (Contd.)

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


Traditional Methods of Defining the Submarket

Prior to selecting comparable properties the analyst must define the relevant submarket

Defined as a set of properties that would be considered substitutes in the mind of the typical buyer of such property


Submarket (Contd.)

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


Newer Methods for Defining Residential Submarkets

Expert systems can be developed to select the geographic area considered a useable submarket

The typical process is to start with

the block group where the subject property is located and then to add blocks in all directions that satisfy certain criteria


Submarket Definition (Contd.)

If the defined area is too small to generate a reasonable number of comparable properties that have sold recently, criteria must be relaxed and the area expanded


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


Adjusting the Comps (Contd.) 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 – ideally a paired sales analysis is used to make such adjustments

Simple Example


A market analysis "grid" or chart lists the subject property and comps along one dimension, and their value-influencing or price-influencing factors along the other dimension


Confidence in the Conclusion of Market Value

Two major reasons for dispersion in the estimation of market value:– Omitted variables– Random error or noise

Multiple Regression and Mass Appraisal

Multiple regression methods aim at solving for selling price as the dependent variable

Example

Selling price = $85(Sq. ft) + $2500 (Bedrooms) + $1200 (Baths) + …+ error


ValueSure AVM

The value model used by FNIS includes multiple regression analysis, repeat sales trends and assessor information

It is a comprehensive four page reportwhich consists of a predicted market value for a subject property and a series of unique charts and data which show pricetrends and sales distributions for the surrounding market


END

chapter 13 the market approach to value

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