Valuation, Market Analysis, and Pricing
The three approaches
Sales comparison (best for residential), cost (replacement cost minus depreciation plus land-useful for unique or new construction), and income (capitalization rate and gross rent multiplier for investment property). Reconciliation weights the approaches to reach a final opinion of value. Highest and best use asks what use is legally permissible, physically possible, financially feasible, and maximally productive.
CMA versus appraisal
A licensee may prepare a comparative market analysis to help price a listing; a valuation for lending purposes must be performed by a state-licensed or certified appraiser. Never label a CMA an appraisal, and never accept compensation contingent on a predetermined value.
Adjustments
Compare the subject to closed comparables and adjust the comparable toward the subject-never adjust the subject. If the comparable is inferior, add value; if superior, subtract.
Market conditions
Absorption rate and months of inventory define buyer's versus seller's markets (roughly six months of inventory is balanced). Direction matters: a higher cap rate means lower value; a higher gross rent multiplier means higher price relative to rent.
Worked example
Subject is 2,000 sq ft; a comparable of 1,800 sq ft sold for $360,000, or $200 per sq ft. Because the comparable is smaller, add $200 × 200 = $40,000, giving an adjusted value of $400,000 for the subject.
Traps
Adjusting the subject instead of the comparable; using active listings as if they were closed sales; treating assessed value as market value; using an annual GRM with monthly rent.