Valuation and Market Analysis
What value means
Market value assumes demand, utility, scarcity, and transferability, plus an arm's length transaction with informed parties and reasonable exposure time. Highest and best use is the reasonably probable, legal, financially feasible use that produces the greatest value. Price is what was paid, cost is what was spent, value is an opinion.
The three approaches
Sales comparison for residences, cost approach for special purpose and new construction (reproduction or replacement cost minus depreciation, plus land), and income capitalization for investment property. Reconciliation weights the most relevant approach. Depreciation is physical deterioration, functional obsolescence, or external obsolescence.
Adjusting comparables
The rule: adjust the comparable, never the subject. If the comparable is superior, subtract; if inferior, add. Net adjustments measure the total dollar difference; gross adjustments measure how different the comp is, and heavy gross adjustment weakens reliability.
Formulas to hold
Gross rent multiplier equals price divided by gross monthly rent. Cap rate equals net operating income divided by price. NOI excludes debt service, depreciation, and capital improvements. Absorption rate and months of inventory reveal a buyer or seller market.
Traps
- Calling a comparative market analysis an appraisal. Licensees may not appraise; appraisals are performed by state-certified or licensed appraisers.
- Adjusting the subject upward instead of the comp downward.
- Including debt service in NOI.
Worked example
A comparable sold for 312,000 and has an extra full bath worth 9,000 that the subject lacks. The comparable is superior, so subtract 9,000: adjusted value 303,000.