Valuation, Pricing, and Market Analysis
What this domain tests
This domain tests the three appraisal approaches, adjustment logic, capitalization, gross rent multipliers, highest and best use, and the difference between a CMA and an appraisal.
Approaches to value
Sales comparison adjusts comparable sales to the subject. If a comparable is superior, subtract; if inferior, add. The cost approach uses land value plus replacement or reproduction cost minus depreciation. The income approach uses value = net operating income divided by cap rate; cap rate = NOI divided by value. The gross rent multiplier is price divided by gross rent; value = gross rent x GRM. Reconciliation weights approaches by property type and data quality.
Market analysis
Market value assumes a willing buyer and seller, reasonable exposure, informed parties, and no undue pressure. Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive. Absorption rate is homes sold per period divided by inventory. Months of inventory is inventory divided by monthly sales. A CMA is a broker opinion, not an appraisal; lending appraisals must be independent.
Worked example
A duplex has NOI of $24,000 and the market cap rate is 8%. Value = $24,000 divided by 0.08 = $300,000. A comparable sold for $280,000 with gross monthly rent of $2,400. Annual gross rent is $28,800, so GRM = $280,000 divided by $28,800 = 9.72. Applying that to subject annual rent of $30,000 gives about $291,667.
Traps
Do not add for a superior comparable; subtract. Do not use gross rent instead of NOI in a cap rate. Do not call a CMA an appraisal. Do not ignore vacancy and expenses.