Property Valuation and Comparative Market Analysis
Value and the three approaches
Market value is the most probable price in a competitive, arm's-length sale with informed, willing parties and reasonable exposure time. Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive.
- Sales comparison approach: adjust comparable sales for differences (market conditions, location, size, quality, amenities, terms) to make each comparable equal to the subject. Never adjust the subject to the comparable. If the comparable is superior, subtract; if inferior, add.
- Cost approach: replacement or reproduction cost new, minus depreciation (physical deterioration, functional obsolescence, external obsolescence), plus land value. Best for new or special-purpose property.
- Income approach: value equals net operating income divided by the capitalization rate. Gross rent multiplier: value equals rent times GRM. Higher cap rate means lower value; lower GRM means higher value.
Reconciliation weights the approaches into a single opinion of value.
Licensee versus appraiser
A CMA or broker price opinion is a brokerage tool. A state-certified appraiser is required for federally related transactions. A licensee may prepare a CMA to help a client price a home but must never call it an appraisal or misrepresent it as one.
Traps: using the listing price instead of the sale price; forgetting that NOI is before debt service and income taxes; adjusting in the wrong direction.
Worked example. NOI is $60,000 and the market cap rate is 8%, so value is $60,000 divided by 0.08, or $750,000. If the required cap rate rises to 10%, value falls to $600,000.