Valuation, Pricing, and Market Analysis
Value, price, and market
Market value assumes a willing buyer and seller, both informed, neither compelled, with reasonable exposure time. Price is what a particular transaction produced; cost is what construction took. Value rests on demand, utility, scarcity, and transferability.
Approaches. The sales comparison approach dominates residential work: adjust the comparables toward the subject. If the comparable is superior, subtract; if inferior, add - you are adjusting the comparable's price to estimate what the subject would have brought. The cost approach suits new or unique construction: replacement or reproduction cost minus physical deterioration, functional obsolescence, and external obsolescence, plus land value. The income approach capitalizes net operating income: value = NOI ÷ capitalization rate.
Principles. Substitution, contribution, conformity, progression and regression, increasing and decreasing return, anticipation, and highest and best use - the reasonably probable, legally permissible, physically possible, financially feasible use that produces the greatest value.
Market analysis. A CMA is a licensee's pricing opinion, not an appraisal; an appraisal is a supported value opinion. Watch absorption rate, days on market, list-to-sale ratio, and months of inventory to identify a buyer's or seller's market. Overpricing lengthens marketing time and usually nets the seller less.
Worked example
Subject: 1,800 sq. ft., 3 bed/2 bath. Comparable sold for $300,000, has 2,000 sq. ft. (superior by $20,000) and poorer condition (inferior by $10,000). Adjusted value = $300,000 − $20,000 + $10,000 = $290,000.
Income example: NOI of $30,000 at an 8% cap rate yields $375,000. A rising cap rate lowers value.
Rule of thumb: always adjust the comparable to look like the subject, and adjust for what the market pays for, not for what the owner loves.