5/3/2013

Market Approach

Market Approach

“It is a comparative approach that considers the

sales of similar or substitute assets and related
market data. In general, an asset being valued is
compared with similar items that have been
transacted in the market or that are listed or offered
for sale, with appropriate adjustment to reflect
different properties or characteristics”
(IVS, 2011)

1
 5/3/2013

Market Approach

• “It is a set of procedures in which a value

indication is derived by comparing the property
being appraised to similar properties that have
been sold recently, applying appropriate units of
comparison, and making adjustments to the sale
prices of the comparables based on the elements
of comparison”
(Appraisal Institute, 2001)

Market Approach
• The sales comparison approach is based
primarily on the principle of substitution, which
holds that a prudent individual will pay no more
for a property than it would cost to purchase a
comparable substitute property.
• The approach recognizes that a typical buyer
will compare asking prices and seek to purchase
the property that meets his or her wants and
needs for the lowest cost.

2
 5/3/2013

Supply and Demand

• Property prices result from negotiations between
buyers and sellers, and they are influenced by
the activities of the lenders

BUYER SELLER

LENDER

Supply and Demand

BUYERS PROPERTIES

Market Demand Supply

To estimate, consider potential users’: To analyze, focus on:

• purchasing power • existing unsold /vacant properties
• taste • properties being constructed,
• preferences converted or planned

Shifts in any of these factors may cause the prices of the

subject property and comparable properties to vary

3
 5/3/2013

Supply and Demand

• Sales activity is also influenced by lenders, as
most real estate purchases are financed

accelerates
rise

drops

Supply and Demand

• Sales activity is also influenced by lenders, as
most real estate purchases are financed

rise
slow down
fall

4
 5/3/2013

Supply and Demand

• Sales activity is also influenced by lenders, as
most real estate purchases are financed

scarce
severely
reduced

Substitution
• Principle: value of a property tends to be set by the price
that would be paid to acquire a substitute property of
similar utility and desirability within a reasonable amount
of time

SUBSTITUTE Not available MARKET Diminished

APPROACH Reliability

5
 5/3/2013

Balance
• The forces of supply and demand tend toward
equilibrium, or balance, in the market, but absolute
equilibrium is almost never attained.

• population
• constructions
• purchasing
of new bldgs
power
• conversion to
• consumer
other uses
tastes &
• demolition of
preferences
old bldgs

Balance
• Another aspect is the relationship between land
and improvements and between a property and
its environment
• Both must be in balance for a property to reflect
its optimum market value.
• Examples of imbalance:
– Too much land in relation to its improvements
– Too many expensive amenities for its location
• Appraisers must watch for imbalances in the
market and within specific properties because
they can cause the market to ascribe different
prices to otherwise comparable properties.

6
 5/3/2013

Externalities

• Positive and negative external forces affect all

types of property (e.g., periods of economic
development and depression)
• An appraiser analyzes the market area of the
subject property to identify all significant external
influences.

Externalities
• To a great extent, the adjustments made for
location reflect these external forces (e.g., which
has less attractive surroundings).
• Other factors that vary with location:
– Condition and lighting of streets
– Convenience of transportation facilities
– Adequacy of police protection
– Enforcement of municipal regulations
– Proximity to shopping and restaurant facilities

7
 5/3/2013

Applicability
• Applicable to all types of real property
interests when there are sufficient recent,
reliable transactions to indicate value
patterns or trends in the market
• Often provides a supportable indication of
market value for property types that are
bought and sold regularly

Applicability

• Most straightforward and simple way to

explain and support a value opinion when
data is available

8
 5/3/2013

Limitations
• Becomes limited when
market is weak and
few market transactions are available
• Example:
– Not applied to special-purpose properties
• Few similar properties maybe sold in a given
market
• Use cost approach instead

Procedure

1. Researching transactional data

2. Verifying transactional data
3. Selecting units of comparison
4. Analyzing and adjusting comparable sales
5. Reconciling value indications

9
 5/3/2013

PROCEDURES

1. Researching Transactional Data

Goal:
Find a set of comparable sales as similar
as possible to the subject property.

PROCEDURES

1. Researching Transactional Data

• Research the competitive market for
information on:
– Sales transactions, listings and offers
• On properties that are similar to the
subject property in terms of characteristics
such as:
– Property type – Physical condition
– Date of sale – Location
– Size – Land use constraints

10
 5/3/2013

PROCEDURES

1. Researching Transactional Data

• Data from completed transactions is considered
the most reliable value indicator.
• Because conclusions must be market-derived,
the appraiser will rely heavily on interviews,
personal contracts and proprietary research.
• Sources include:
– Public records – Real estate periodicals
– Multiple listing services – Interviews with parties
– Subscription services involved
– Real estate brokers

PROCEDURES

2. Verifying Transactional Data

• Verify information by confirming that the:
– Data obtained is factually accurate
– Transactions reflect arm’s-length market
considerations
– arm’s-length transaction:
a transaction between unrelated parties under no duress
• Verification may elicit additional information
about the market

11
 5/3/2013

PROCEDURES

3. Selecting Units of Comparison

Goal:
define and identify a unit of comparison that
explains market behavior

PROCEDURES

3. Selecting Units of Comparison

• Units of comparison
– Components into which a property may be
divided for purposes of comparison
• Relevant units of comparison:
– e.g., price per hectare, price per square meter, price per
front foot

12
 5/3/2013

PROCEDURES:
Selecting Units of
Comparison
Typical Units of Comparison
Property Type Typical Units of Comparison
Single-family residential property Price per m2 of gross living area
Apartment properties Price per room
Price per m2 of gross building area
Warehouses Price per m2 of gross building area
Price per m3 of gross building volume
Factories Price per m2 of gross building area
Price per machine unit
Office Properties Price per m2 of gross building area
Price per m2 of net rentable area
Price per m2 of usable area
Hotels and motels Price per guest room
Restaurants, theaters and auditoriums Price per seat
Hospitals Price per m2 of gross building area
Price per bed

PROCEDURES:
Selecting Units of
Comparison
Typical Units of Comparison
Property Type Typical Units of Comparison
Golf Courses Price per round (annual number of
round played)
Price per membership
Price per hole
Price per hectare
Tennis and racquetball facilities Price per playing court
Mobile home parks Price per parking pad
Marinas Price per slip
Automobile repair facilities Price per bay
Price per m2 of gross building area
Agricultural properties Price per hectare
Price per animal unit (for pastureland)
Price per board foot (for timberland)
Vacant land Price per front foot
Price per m2
Price per hectare

13
 5/3/2013

PROCEDURES

3. Selecting Units of Comparison

• Develop a comparative analysis for each unit.
– Conversion of sale price to size-related unit prices
usually eliminates the need to make adjustments
for size differences.
– It may sometimes be necessary to adjust for
differences in economies of sale
• Solution: select comparables in the same size range as
the subject

PROCEDURES

4. Analyzing and Adjusting Comparable Sales

• Look for differences between:

Comparable sale properties vs. subject property
• Use elements of comparison
• Adjust price of each sale property
– To reflect how it differs from the subject property
– Or eliminate that property as comparable
• Typically involves using the most comparable
sale properties and then adjusting for any
remaining differences.

14
 5/3/2013

PROCEDURES

4. Analyzing and Adjusting Comparable Sales

NO ADJUSTMENTS

Comparable YES
Property

Identical? Subject
(Y/N) Property

Comparable
Property NO

ADJUSTMENT FOR DIFFERENCES

4. Analyzing and Adjusting Comparable Sales

• Organize sales information

– e.g., use market grid
– A way to model typical buyer conditions and
analyze sales data to quantify the impact of
certain characteristics on value

15
 5/3/2013

4. Analyzing and Adjusting Comparable Sales

Sale Price

4. Analyzing and Adjusting Comparable Sales

Sale Price

yes Sufficient no
QUANTITATIVE QUALITATIVE
data?
TECHNIQUE (Y/N)
TECHNIQUE

Mathematical Qualitative
applications relationships

16
 5/3/2013

4. Analyzing and Adjusting Comparable Sales

• Adjustments can be made either to
– Total property prices or
– Appropriate units of comparison
• Adjustments made to the total sale price:
– Property rights conveyed
– Financing
– Conditions of sale (motivation)
– Date of sale (market condition)
– Expenditures made immediately after purchase
• Adjusted price is then converted into a unit price
and adjusted for other elements of comparison
such as location and physical characteristics.

PROCEDURES:
Analyzing and Adjusting Comparable Sales

Elements of Comparison
• Are the characteristics of properties and
transactions that help explain the variance of
prices paid for real estate
• Determines through market research and
supports those conclusions with market data
• When properly identified, elements of
comparison describe the factors that are
associated with prices paid for competing
properties.

17
 5/3/2013

PROCEDURES:
Analyzing and Adjusting Comparable Sales

Basic Elements of Comparison

1. Real property rights conveyed
2. Financing terms
3. Conditions of sale
4. Expenditures made immediately after purchase
5. Market conditions (time)
6. Location
7. Physical characteristics
8. Economic characteristics
9. Use (Zoning)
10.Non-realty components of value

PROCEDURES:
Analyzing and Adjusting Comparable Sales

Identification and Measurement of Adjustments

• Comparative analysis
– Includes the consideration of both
quantitative and qualitative factors.
– Quantitative adjustments
 Peso or percentage amounts
– factors that cannot be quantified
 Qualitative adjustments

18
 5/3/2013

PROCEDURES

5. Reconciling Value Indications

• Reconcile the various value indications
produced from the analysis of comparables into
a single value indication or range of values.

Range of Value
Summarize
Data and Value
Analyses indications
Re-examine
Point
Estimate

Note: The appraisal report should clearly communicate how the appraiser
arrive at the value conclusion.

Property Rights Conveyed

• In most situations, fee simple title will be conveyed.

However, when the comparables differ from the subject
in the extent of rights conveyed, adjustment is required.
• The appraiser must also be aware of the effects of
easements and leaseholds on the price and must apply
adjustments accordingly.
• a. Easements
b. Leased fee/leasehold
c. Mineral rights
d. Others

19
 5/3/2013

Direct Market Comparison Technique

Principle of substitution:
Potential buyer will pay no more for a property than what
has been paid for another equally desirable property
Theory:
Market value of (subject property) bears a close
relationship to the prices of similar properties
(comparable property) that have recently changed hands.
Adjustments:
Since no two properties are exactly alike we need to adjust
the sales price of comparable property to arrive at the
estimated market value for the subject property

Steps in Market Approach

• First, find comparable properties that have sold recently

• Second, identify key features of the comparable and
subject property
• Third, adjust the sales price of comparable properties to
reflect the differences between comparable properties and
the subject property.
• Fourth, estimate market value through a reconciliation
process that weighs the adjusted prices of comparable.

20
 5/3/2013

Factors To Adjust

• Property characteristics:
– size of parcel
– location
– square meters
– number of bedrooms
– type of construction
– quality of construction
– number of bathrooms
– age of building
– living area, etc

Factors To Adjust

• Non-property characteristics
– date of sale
– sales price
– financing terms
– condition of sale

21
 5/3/2013

Market Comparison Approach

Sales Comparison Subject Comp1 Comp2 Comp3

Price P146,000 P138,000 P136,000
Corner influence No Yes No No
Financing Yes No Yes No

Adjustments
Corner influence -P5,000
Financing P2,000 P2,000
Adjusted Price P143,000 P138,000 P138,000
Weights 30% 40% 30%

Estimated Value P139,500 P42,900 P55,200 P41,400

22