Valuation, Pricing, and Market Analysis
Approaches to Value
Know the three approaches: sales comparison, cost, and income. Understand when each applies: sales comparison for residential resale, cost for special-purpose or new construction, income for investment property. Learn the adjustment process in the sales comparison approach, including the principle that you adjust the comparable to the subject. Understand the concepts of highest and best use, substitution, contribution, and depreciation (physical, functional, external).
Market Analysis and Pricing
Distinguish a comparative market analysis from an appraisal; licensees may prepare CMAs but not appraisals unless appropriately certified. Understand absorption rate, days on market, list-to-sale ratio, and how supply and demand affect pricing. Know how to select comparables by location, size, condition, and recency of sale.
Traps
Frequent traps: adjusting the subject to the comparable instead of the reverse; treating a CMA as an appraisal; and ignoring external obsolescence because it is off-site. Another trap is using gross rent multipliers without verifying expense assumptions.
Worked Example
A subject has 3 bedrooms and a comparable has 4; the comparable sold for more. Rule of thumb: adjust the comparable downward for the feature it has that the subject lacks, because you are estimating what the comparable would have sold for if it matched the subject.