Property Valuation and Market Analysis
Value, price, and the three approaches
Market value assumes informed, willing parties, no undue pressure, and a reasonable exposure time. Value rests on demand, utility, scarcity, and transferability, and on principles such as substitution, conformity, contribution, anticipation, and highest and best use. Highest and best use is the reasonably probable use that is legal, physically possible, financially feasible, and maximally productive - not simply the current use or the most expensive use.
The sales comparison approach is the workhorse for residential property. Adjust the comparables toward the subject: if the subject is superior to a comp, subtract from the comp; if the subject is inferior, add. Never adjust the subject. The cost approach works best for new or special-use property: land value plus replacement or reproduction cost minus depreciation (physical deterioration, functional obsolescence, external obsolescence). The income approach capitalizes net operating income: value = NOI ÷ cap rate, and NOI excludes debt service, depreciation, and capital improvements.
Traps
Price is not value; cost is not value. A comparative market analysis is a broker price opinion, not an appraisal, and must be labeled as such. Gross rent multipliers use gross rent, cap rates use net income. A 5% adjustment in the wrong direction flips the answer - recheck the sign before you compute.
Worked example
A comp sold for $320,000 with a two-car garage the subject lacks (worth $12,000), and prices have risen about 3% since that sale. Subtract $12,000 for the superior feature, then add 3% of $320,000 ($9,600) for market conditions: $320,000 − $12,000 + $9,600 = $317,600 indicated value.