Valuation, Market Analysis, and Pricing
Value and the three approaches
Market value assumes a willing buyer and seller, both informed, no undue pressure, and a reasonable exposure period. The three approaches: sales comparison (most reliable for owner-occupied homes), cost (reproduction or replacement cost minus depreciation - physical deterioration, functional obsolescence, external obsolescence - plus land value; used for new or special-purpose property), and income (capitalization for investment property). Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive.
Tools
Gross rent multiplier = price ÷ gross monthly (or annual) rent. Capitalization rate = net operating income ÷ price. Income approach works with NOI - gross income minus vacancy and operating expenses - excluding debt service, depreciation, and capital improvements. Adjustments in the sales comparison approach: raise the comparable's price when the subject is superior to it, lower it when the subject is inferior. A CMA/BPO is a broker's pricing opinion, not an appraisal governed by USPAP; an appraisal requires a licensed appraiser.
Traps
- Using gross income instead of net operating income in a cap rate calculation.
- Adjusting the subject instead of the comparable.
- Treating a CMA as an appraisal.
- Forgetting that market conditions (time) adjustments can be positive or negative.
Worked example: A duplex produces $40,000 gross income, 5% vacancy, and $16,000 operating expenses → NOI = $22,000. At a 7.3% cap rate, value ≈ $22,000 ÷ 0.073 ≈ $301,370. Using the GRM instead: price ÷ monthly rent.