Chapter 13 The Market Approach to Value

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
• Confidence Ranges and Appraised Values
• Multiple Regression Applicability in Appraisal

3
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

4
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

5
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

6
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

7
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

8
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

9
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

10
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

11
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
Real Estate Principles for the New Economy
Norman G. Miller and David M. Geltner
12
(No Transcript)
13
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

14
ValueSure AVM

• The value model used by FNIS includes
• multiple regression analysis, repeat sales
• trends and assessor information
• It is a comprehensive four page report
• which consists of a predicted market
• value for a subject property and a series of
• unique charts and data which show price
• trends and sales distributions for the
• surrounding market

15
END