Valuation, Market Analysis and Pricing
Core concepts
Value is the present worth of future benefits. Appraisers use the sales comparison approach, cost approach, and income approach, then reconcile to a final opinion. Licensees prepare comparative market analyses (CMAs), which are not appraisals. Highest and best use is the reasonably probable use that produces the highest value. The sales comparison approach adjusts comparable sales to the subject: if a comparable is superior, subtract; if inferior, add. Income valuation uses net operating income and capitalization rates; gross rent multipliers offer a quick income check.
Traps
A frequent error is adjusting in the wrong direction. Another is averaging adjusted comparables rather than weighing them. Do not call a CMA an appraisal or promise a specific sale price. Watch for market conditions adjustments when prices are changing. Depreciation in the cost approach includes physical deterioration, functional obsolescence, and external obsolescence. A "bracketing" set of comparables helps confirm the range.
Worked example
Subject has 3 bedrooms; Comparable A has 4 and sold for $320,000. The market shows a $10,000 bedroom adjustment. Because the comparable is superior, subtract $10,000, producing an adjusted value of $310,000. If Comparable B is inferior by $5,000, add it. Then reconcile: the adjusted values should form a tight range around the subject's indicated value.
Rule of thumb
Adjust the comparable to look like the subject-superior comparable, subtract; inferior comparable, add. Never average blindly; explain the weight given to each comparable and the market conditions.