“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner 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

Simple Example “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner 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