Property Valuation, Market Analysis, and Pricing
Three approaches
Sales comparison dominates residential pricing; the cost approach suits new or unique construction; the income approach (capitalization) serves investment property. Highest and best use frames every approach.
CMA versus appraisal
A comparative market analysis is a licensee's opinion of price built from closed, pending, and active comparables. An appraisal is performed by a state-licensed or certified appraiser under Minn. Stat. ch. 82B and USPAP.
Adjustments
Compare like to like and adjust the comparable toward the subject: if the comparable is superior, subtract; if inferior, add. Sequence location first, then size, condition, garage, and market time. Large net or gross adjustments signal weak comparables.
Income math
Cap rate = net operating income ÷ price. GRM = price ÷ gross annual rent.
Worked example
A fourplex produces $48,000 NOI and sells for $600,000, so the cap rate is 8%. A comparable nearby sold for $570,000 but has a superior garage worth $12,000. Because the comparable is superior, subtract $12,000, indicating $558,000 before any time adjustment.
Traps that cost marks
- Adjusting in the wrong direction - the most common error.
- Using an active listing as a closed comparable.
- Applying price per square foot to dissimilar homes.
- Confusing assessed value with market value.
- Quoting a cap rate computed from gross rent rather than NOI.