Valuation and Market Analysis
Value is the heart of every transaction. This topic covers the economic principles behind value, the three approaches appraisers use, and how licensees prepare a comparative market analysis.
Value, Price, and Cost
Market value is the most probable price a property should bring in a competitive, open market between a willing buyer and willing seller, both acting knowledgeably and without undue pressure. Value is distinct from price (what a buyer actually pays) and cost (the money spent to build or improve). The four essential characteristics of value are Demand, Utility, Scarcity, and Transferability (DUST). Key principles include substitution (a buyer pays no more than the cost of an equal substitute), supply and demand, highest and best use, and contribution.
The Three Approaches to Value
The sales comparison approach compares the subject to recent sales of similar properties, adjusting for differences; it is most reliable for single-family homes. The cost approach estimates the cost to replace the improvements new, subtracts depreciation, and adds land value; it is best for new or special-purpose buildings with few comparables. The income approach converts a property's expected income into value (Value = Net Operating Income / capitalization rate) and is used for income-producing property. The appraiser reconciles the approaches into a final opinion of value.
Comparative Market Analysis (CMA)
A CMA is prepared by a licensee (not a certified appraisal) to help a seller price a listing or a buyer make an offer. It reviews comparable properties that are sold, currently for sale, and expired, then adjusts for differences in size, condition, location, and features. Depreciation reduces value through physical deterioration, functional obsolescence (outdated design), and external (economic) obsolescence caused by factors outside the property, which is generally incurable.