1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 12 TRADITIONAL APPROACHES TO ESTIMATING VALUE Sales Comparison Approach Cost Approach Income Capitalization Approach

2 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin THE SALES COMPARISON APPROACH Identify properties that have sold that are comparable to the subject property. Adjust each comparable property’s sale price to account for its differences from the subject property. Reconcile the comparable properties’ final adjusted sale prices to determine a single indicated value.

3 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Types and Sequence of Adjustments Transaction Price +/- Conditions of Sale +/- Financing Terms Normal Sale Price +/- Market Conditions Market-adjusted Normal Sale Price +/- Location +/- Physical and Legal Characteristics, etc. Final Adjusted Sale Price

4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Estimate of Adjustment for Market Conditions

5 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Paired Sales Analysis Adjustment

6 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Simplified Example: Market Data Grid

7 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Simplified Example: Adjustment Grid

8 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Simplified Example: Reconciliation of Final Adjusted Sale Prices

9 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin MULTIPLE REGRESSION MODELS A Linear Multiple Regression Equation:

10 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Estimated Regression Model Statistics

11 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin THE COST APPROACH

12 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Estimation of the Cost of the Improvements Reproduction Cost Replacement Cost Estimation Methods –Comparative Unit (e.g., $/sq. ft.) –Unit in Place (e.g., $/component installed) –Breakdown Approach (e.g., labor, materials, etc.)

13 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Estimation of Accrued Depreciation Physical Deterioration –Short-lived (curable and incurable) –Long-lived Functional Obsolescence –Curable –Incurable External Obsolescence

14 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin GROSS RENT MULTIPLIER ANALYSIS Identify comparable rental properties that have sold recently. Calculate the gross rent multiplier for each comparable property. GRM = sale price/monthly gross rent

15 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin GROSS RENT MULTIPLIER ANALYSIS Estimate the market rent of the subject property from comparable properties. Estimate the value of the subject property where, V = subject’s gross rent x GRM.