Property Valuation and Market Analysis
Property Valuation and Market Analysis tests whether you can choose the right valuation method, apply adjustments in the correct direction, and distinguish an appraisal from a broker's pricing opinion. CeRER items favor short scenarios: a comparable with a pool, a duplex with below-market rents, a new build on an older block.
The three approaches
Sales comparison is the primary approach for owner-occupied residential property: closed comparables are adjusted to the subject, never the reverse. If the comparable is superior, subtract; if inferior, add. The cost approach - land value plus depreciated replacement cost - suits new or unusual construction; depreciation splits into physical deterioration, functional obsolescence, and external obsolescence. The income approach capitalizes net operating income: value = NOI ÷ cap rate, while the gross rent multiplier = price ÷ gross monthly rent.
Highest and best use
Every valuation must confirm the use that is legally permissible, physically possible, financially feasible, and maximally productive. A legally nonconforming use can still be the highest and best use if it may continue; a rezoning can shift value overnight.
Appraisal versus market analysis
A comparative market analysis or broker price opinion is a pricing opinion prepared for a client, not a USPAP appraisal, and must never be presented as one. Federally related transactions require a state-licensed appraiser and appraisal independence: no coercion of the appraiser and no conditioning value on a target number.
Worked example
A subject has four bedrooms and no pool. Comparable A sold for $320,000, has three bedrooms (worth $8,000) and a pool (worth $15,000). The comparable is inferior on bedrooms, so add $8,000; it is superior on the pool, so subtract $15,000. The net adjustment is minus $7,000, giving an indicated value of $313,000. Adjusting the subject instead of the comparable - or reversing the signs - is the most common arithmetic error on these items.
Traps
Using a gross rent multiplier as if it were a cap rate; applying a cap rate to gross income rather than NOI; presenting a CMA as an appraisal; using a comparable from another neighborhood without a documented line adjustment; and ignoring seller concessions, which must be adjusted for because a seller-paid buydown inflates the recorded price.