Transcript Chapter 13 The Market Approach to Value

Chapter 13
The Market Approach to
Value
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
 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.)
 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
 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.)
 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
 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.)
 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
 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.)
 Time adjustments 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
Feature adjustments 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 used to make such adjustments
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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
 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
 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
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner