Valuation, Pricing, and Market Analysis
Approaches and adjustments
Licensees prepare comparative market analyses and price opinions; they do not perform appraisals, which are governed by USPAP and Minnesota appraiser licensing law. The three approaches: sales comparison (the workhorse for residential), cost (replacement cost minus depreciation plus land - useful for new or unusual property), and income (value = net operating income ÷ capitalization rate, or value = annual rent × gross rent multiplier). Core principles: substitution, contribution, conformity, progression and regression, highest and best use, and external obsolescence.
In sales comparison, adjust the comparables toward the subject - never adjust the subject. If a comparable requires large adjustments, choose a different comparable. Typical adjustments: date of sale, location, size, bedroom and bath count, garage, finished basement, condition, and lot. Net adjustments reveal how similar the comparable really is; gross adjustments reveal how much judgment went into the analysis. Market analysis also uses absorption rates, days on market, list-to-sale price ratios, and price-per-square-foot cross-checks.
Traps
- Adjusting the subject to match the comparables.
- Calling a CMA an appraisal or using appraisal language carelessly.
- Using square footage without confirming above-grade gross living area.
- Comparing a distressed or foreclosure sale to an arm's-length sale without an adjustment.
Rule of thumb
If total net adjustments exceed roughly 10%, or gross adjustments exceed roughly 25%, the comparable is weak - find a better one.
Worked example
Subject is a three-bedroom home; a four-bedroom comparable sold for $360,000. The bedroom adjustment is $8,000 and the comparable is superior, so subtract: $352,000 adjusted value. A comparable sold six months ago in a rising market would take a positive time adjustment.