Property Valuation, Pricing, and Market Analysis
This domain tests whether you can support a number. Items cover the three approaches, adjustment logic, income math, and the market statistics used to advise a seller on price and a buyer on offer strategy.
Three approaches
- Sales comparison: adjust comparables toward the subject. If the comparable is superior, subtract; if inferior, add.
- Cost: land value plus replacement cost minus depreciation (physical, functional, external); most reliable for new or special-purpose property.
- Income: value = net operating income divided by capitalization rate; gross rent multiplier = price divided by gross rent.
Market analysis
Months of inventory = active listings divided by monthly closings; roughly six months is balanced, under four favors sellers. Also track days on market, list-to-sale price ratio and absorption by price band. A broker price opinion is not an appraisal and must never be presented as one; appraisals require a licensed appraiser operating independently of sales pressure.
Highest and best use
Legally permissible, physically possible, financially feasible, maximally productive, tested in that order.
Worked example
A subject house has no garage. The best comparable sold for 420,000 with a two-car garage; paired sales in the same subdivision show a garage contributes about 15,000. Months of inventory is 120 active listings divided by 20 monthly sales, or 6. Reasoning: the comparable is superior to the subject in the garage feature, so subtract: 420,000 minus 15,000 equals 405,000 adjusted value. Six months of inventory is balanced, so a list price near the adjusted value is defensible; pricing 10 percent above it tends to lengthen days on market without lifting the final price.
Adjustment discipline: make the fewest adjustments possible, derive amounts from the market rather than from construction cost, and never adjust the subject property.
Traps
- Adjusting in the wrong direction, or double-counting one feature in two adjustments.
- Using the cost approach when an active market supplies direct comparables.
- Taking a cap rate from a different property class, or computing net operating income without vacancy and reserves.
- Treating an automated valuation or portal estimate as an appraisal.
- Presenting a price opinion as a guarantee of value.