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Chapter 13 The Market Approach to Value. Major Topics. Limitations and advantages of the market approach to value Defining a submarket of comparable property Selecting comparable property or comps Adjusting Comps towards the subject property Confidence Ranges and Appraised Values

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chapter 13 the market approach to value
Chapter 13The Market Approach to Value

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

major topics
Major Topics
  • Limitations and advantages of the market approach to value
  • Defining a submarket of comparable property
  • Selecting comparable property or comps
  • Adjusting Comps towards the subject property
  • Confidence Ranges and Appraised Values
  • Multiple Regression Applicability in Appraisal

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

introduction
Introduction
  • The Market Approach is in many respects, the most fundamental and important of the three traditional approaches to valuation
  • Definition: An approach to estimating market value of a subject property by means of examining the transaction prices of recent sales of properties similar to the subject property in the same or similar real estate asset market

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

introduction contd
Introduction (Contd.)
  • Steps in the Market Approach process:
    • Define the submarket of comparable properties
    • Screen and select the comparable properties
    • Adjust the comps towards the subject property
    • Develop a conclusion of value

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

traditional methods of defining the submarket
Traditional Methods of Defining the Submarket
  • Prior to selecting comparable properties the analyst must define the relevant submarket
  • Defined as a set of properties that would be considered substitutes in the mind of the typical buyer of such property

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

submarket contd
Submarket (Contd.)
  • Geographic Areas:
  • Waterfronts; Major roads; School districts
  • Similar zoning; Similar local government
  • Similar age of development
  • Similar access to employment or shopping or

entertainment

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

newer methods for defining residential submarkets
Newer Methods for Defining Residential Submarkets
  • Expert systems can be developed to

select the geographic area

considered a useable submarket

  • The typical process is to start with

the block group where the subject

property is located and then to add

blocks in all directions that satisfy

certain criteria

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

submarket definition contd
Submarket Definition (Contd.)
  • If the defined area is too small to generate a reasonable number of comparable properties that have sold recently, criteria must be relaxed and the area expanded

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

adjusting the comps
Adjusting the Comps
  • The analyst is trying to answer the following question:

“What would the comp sell for if it were identical to the subject property?”

  • The types of adjustments may include:
    • Time
    • Size
    • Quality
    • Features and Lot Size
    • Location
    • Financing

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

adjusting the comps contd
Adjusting the Comps (Contd.)
  • Timeadjustments should be made prior to feature adjustments, especially if the objective of the valuation is to derive current market value
  • Size adjustments are based on units of

comparison

  • Featureadjustments are based on

significant features within either the

subject property or the comp

  • Quality adjustments relate to the

condition of the improvements

  • Location and Views may require

adjustments – ideally a paired sales

analysis is usedto make such adjustments

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

simple example
Simple Example

A market analysis "grid" or chart lists the subject property and comps along one dimension, and their value-influencing or price-influencing factors along the other dimension

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

confidence in the conclusion of market value
Confidence in the Conclusion of Market Value
  • Two major reasons for dispersion in the

estimation of market value:

    • Omitted variables
    • Random error or noise

Multiple Regression and Mass Appraisal

  • Multiple regression methods aim at solving for selling price as the dependent variable
  • Example

Selling price = $85(Sq. ft) + $2500 (Bedrooms) + $1200 (Baths) + …+ error

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

valuesure avm
ValueSure AVM
  • The value model used by FNIS includes

multiple regression analysis, repeat sales

trends and assessor information

  • It is a comprehensive four page report

which consists of a predicted market

value for a subject property and a series of

unique charts and data which show price

trends and sales distributions for the

surrounding market

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner

slide15
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner