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In such cases, the price paid for any particular piece is not its market "value" with the idea usually being, though, that all the pieces and prices add up to the market value of all the parts but rather its market "price". At other times, a downloader may willingly pay a premium price, above the generally accepted market value, if his subjective valuation of the property its investment value for him was higher than the market value. One specific example of this is an owner of a neighboring property who, by combining his own property with the subject property, could obtain economies-of-scale.
Similar situations sometimes happen in corporate finance. For example, this can occur when a merger or acquisition happens at a price which is higher than the value represented by the price of the underlying stock. The usual explanation for these types of mergers and acquisitions is that "the sum is greater than its parts", since full ownership of a company provides full control of it.
This is something that downloadrs will sometimes pay a high price for.
This situation can happen in real estate downloads too. But the most common reason for value differing from price is that either the downloader or the seller is uninformed as to what a property's market value is but nevertheless agrees on a contract at a certain price which is either too expensive or too cheap.
This is unfortunate for one of the two parties. It is the obligation of a real property appraiser to estimate the true market value of a property and not its market price.
Market value definitions in the United States[ edit ] In the United States, appraisals are for a certain type of value e. The most commonly used definition of value is Market Value.
Thus, the definition of value used in an appraisal or Current Market Analysis CMA analysis and report is a set of assumptions about the market in which the subject property may transact.
It affects the choice of comparable data for use in the analysis. It can also affect the method used to value the property. These are usually referred to as the "three approaches to value" which are generally independent of each other: The sales comparison approach comparing a property's characteristics with those of comparable properties that have recently sold in similar transactions.
The cost approach the downloader will not pay more for a property than it would cost to build an equivalent. The income approach similar to the methods used for financial valuation, securities analysis or bond pricing. However, the recent trend of the business tends to be toward the use of a scientific methodology of appraisal which relies on the foundation of quantitative-data,  risk, and geographical based approaches.
One or two of these approaches will usually be most applicable, with the other approach or approaches usually being less useful. The appraiser has to think about the "scope of work", the type of value, the property itself, and the quality and quantity of data available for each approach. No overarching statement can be made that one approach or another is always better than one of the other approaches. The appraiser has to think about the way that most downloaders usually download a given type of property.
What appraisal method do most downloaders use for the type of property being valued? This generally guides the appraiser's thinking on the best valuation method, in conjunction with the available data. For instance, appraisals of properties that are typically downloadd by investors e. downloaders interested in downloading single family residential property would rather compare price, in this case, the Sales Comparison Approach market analysis approach would be more applicable.
The third and final approach to value is the Cost Approach to value. The Cost Approach to value is most useful in determining insurable value, and cost to construct a new structure or building.
For example, single apartment buildings of a given quality tend to sell at a particular price per apartment. In many of those cases, the sales comparison approach may be more applicable. On the other hand, a multiple-building apartment complex would usually be valued by the income approach, as that would follow how most downloaders would value it. As another example, single-family houses are most commonly valued with the greatest weighting to the sales comparison approach.
However, if a single-family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful. So the choice of valuation method can change depending upon the circumstances, even if the property being valued does not change much. The sales comparison approach[ edit ] The sales comparison approach is based primarily on the principle of substitution. This approach assumes a prudent or rational individual will pay no more for a property than it would cost to download a comparable substitute property.
The approach recognizes that a typical downloader will compare asking prices and seek to download the property that meets his or her wants and needs for the lowest cost. In developing the sales comparison approach, the appraiser attempts to interpret and measure the actions of parties involved in the marketplace, including downloaders, sellers, and investors.
Data collection methods and valuation process Data is collected on recent sales of properties similar to the subject being valued, called "comparables".
Only SOLD properties may be used in an appraisal and determination of a property's value, as they represent amounts actually paid or agreed upon for properties. Important details of each comparable sale are described in the appraisal report. Since comparable sales are not identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc.
The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property.
If the comparable is superior to the subject in a factor or aspect, then a downward adjustment is needed for that factor. From the analysis of the group of adjusted sales prices of the comparable sales, the appraiser selects an indicator of value that is representative of the subject property. It is possible for various appraisers to choose a different indicator of value which ultimately will provide different property value.
Steps in the sales comparison approach Research the market to obtain information pertaining to sales, and pending sales that are similar to the subject property Investigate the market data to determine whether they are factually correct and accurate Determine relevant units of comparison e. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. Reproduction refers to reproducing an exact replica; replacement cost refers to the cost of building a house or other improvement which has the same utility , but using modern design, workmanship and materials.
In practice, appraisers almost always use replacement cost and then deduct a factor for any functional dis-utility associated with the age of the subject property. An exception to the general rule of using the replacement cost is for some insurance value appraisals. In those cases, reproduction of the exact asset after a destructive event like a fire is the goal. In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches representing both the suppliers' costs and the prices that customers are seeking.
For example, the replacement cost to construct a building can be determined by adding the labor, material, and other costs. On the other hand, land values and depreciation must be derived from an analysis of comparable sales data.
The cost approach is considered most reliable when used on newer structures, but the method tends to become less reliable for older properties.
The cost approach is often the only reliable approach when dealing with special use properties e. The income approach[ edit ] Main article: Income approach The income capitalization Approach often referred to simply as the "income approach" is used to value commercial and investment properties.
Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists. In a commercial income-producing property this approach capitalizes an income stream into a value indication.
Usually, an NOI has been stabilized so as not to place too much weight on a very recent event. An example of this is an unleased building which, technically, has no NOI.
A stabilized NOI would assume that the building is leased at a normal rate, and to usual occupancy levels. Alternatively, multiple years of net operating income can be valued by a discounted cash flow analysis DCF model. The DCF model is widely used to value larger and more expensive income-producing properties, such as large office towers or major shopping centres.
This technique applies market-supported yields or discount rates to projected future cash flows such as annual income figures and typically a lump reversion from the eventual sale of the property to arrive at a present value indication. When homes are downloadd for personal use the downloader can validate the asking price by using the income approach in the opposite direction.
An expected rate of return can be estimated by comparing net expected costs to the asking price. This return can be compared to the home owner's other investing opportunities. Comparative method. Used for most types of property where there is good evidence of previous sales. This is analogous to the sales comparison approach outlined above.
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