Valuation and Market Analysis
Valuation is the process of estimating a property's worth, a skill agents use for pricing and analysis. This chapter reviews the three approaches to value, the economic principles behind them, and the difference between an appraisal and a market analysis.
The Three Approaches to Value
Appraisers estimate value using three approaches. The sales comparison approach compares the property to similar recently sold properties and adjusts for differences; it is most reliable for homes. The cost approach estimates the cost to rebuild, minus depreciation, plus land value, and suits new or special-purpose buildings. The income approach converts a property's expected income into value and is used for investment property.
Principles of Value
Value is influenced by economic principles. Highest and best use is the legally permitted, physically possible, and most profitable use of a site. Substitution holds that a buyer will pay no more than the cost of an equally desirable substitute. Supply and demand, conformity, and the principles of progression and regression (the effect of surrounding properties) also affect value.
Appraisal vs. Comparative Market Analysis
A licensed or certified appraiser prepares a formal appraisal, an independent opinion of value often required by lenders. A real estate agent prepares a comparative market analysis (CMA) using comparable sales to help a seller price a home or a buyer make an offer. A CMA is not an appraisal, and agents must not present one as such.