Valuation and Market Analysis
Estimating value is central to pricing, lending, and advising clients. This chapter explains the three appraisal approaches, the difference between price and value, and how brokers prepare a comparative market analysis. Sound valuation protects buyers, sellers, and lenders from overpaying or underpricing.
Value, Price, and the Principles Behind Them
Market value is the most probable price a property should bring in a competitive and open market, which differs from the actual sale price. Value is influenced by principles such as supply and demand, substitution, and highest and best use. The principle of substitution holds that a buyer will pay no more than the cost of an equally desirable substitute. Location, condition, and market conditions all shape value.
The Three Approaches to Value
The sales comparison approach adjusts recent sales of similar properties and is primary for residential homes. The cost approach estimates the cost to rebuild minus depreciation plus land value, useful for new or special-purpose property. The income approach capitalizes a property's net operating income and applies to investment property. An appraiser reconciles the approaches into a final opinion of value.
Comparative Market Analysis
A broker's comparative market analysis (CMA) uses recent comparable sales, active listings, and expired listings to help a seller set a realistic price. A CMA is not a formal appraisal and must not be presented as one. Adjustments account for differences in size, condition, features, and location. A well-supported CMA helps clients make informed decisions about listing or offer prices.