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Chapter 13 The Market Approach to Value

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 Multiple Regression Applicability in Appraisal.

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Chapter 13 The Market Approach to Value

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  1. Chapter 13The Market Approach to Value

  2. 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

  3. 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.

  4. 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

  5. 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

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

  7. 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

  8. Adjusting the Comps • Timeadjustments 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 • Featureadjustments 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

  9. Market Approach 1. Start with sales P of comparable 2. Adjust for differences in attributes: a. If Subject > Comparable, add value of attribute b. If Comparable > Subject, subtract value of attribute 3. Pcomparable +/- Adjustments = Estimate

  10. 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 Market Approach

  11. 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

  12. Simple Example Value of garage, bedrooms, age? “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

  13. 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

  14. 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

  15. END

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