Real Estate Valuation

Sales Comparison (Market) Approach

Details: Best for: residential properties. Based on principle of substitution — a buyer won't pay more than the cost of an equally desirable substitute property

Example: Three comparable homes sold for $310K, $305K, $315K. Subject property estimated at $310K

Tip: Most common and reliable approach for single-family residential properties

Cost Approach

Details: Best for: new construction, special-purpose buildings (churches, schools), insurance purposes

Example: Land = $80K + New construction cost $220K - $20K depreciation = $280K value

Tip: Most reliable for NEW or special-purpose properties where comparables are scarce

Income Approach

Details: Best for: income-producing properties (apartments, commercial, retail). Based on principle of anticipation

Example: NOI = $50,000, Cap Rate = 8%. Value = $50,000 ÷ 0.08 = $625,000

Tip: Used primarily for investment/commercial properties. Higher cap rate = lower value

Comparable Selection Criteria

Details: Adjust for: location, size, age, condition, features, date of sale, financing terms

Tip: Never adjust the subject property — always adjust the comparable properties

Adjustment Rules

Details: Remember CBS: Comp Better = Subtract, Comp inferior = Add. Always adjust the COMP, never the subject

Example: Comp has pool (+$15K value), subject does not. Subtract $15K from comp price to equalize

Tip: CBS (Comp Better Subtract) — the most tested concept in the sales comparison approach

CMA vs Appraisal

Details: CMA: used for listing/buying strategy, no license required. Appraisal: required for lending, performed by licensed/certified appraiser

Tip: Agents prepare CMAs (not appraisals) — calling it an "appraisal" can violate licensing law

Paired Sales Analysis

Details: Find the dollar adjustment for a specific feature by comparing otherwise identical sales

Example: Home A (with garage) sold for $310K. Home B (no garage) sold for $295K. Garage = $15K adjustment

Reproduction vs Replacement Cost

Details: Reproduction: identical copy (same bricks, same design). Replacement: equivalent function (modern equivalent)

Tip: Replacement cost is more commonly used because it's more practical and available

Physical Deterioration

Details: Curable: cost to fix is less than value added (painting, new roof). Incurable: cost to fix exceeds value added (foundation settling)

Example: A 20-year-old roof (30-year life) = 67% physical deterioration of roof value

Functional Obsolescence

Details: Curable: outdated kitchen, no garage. Incurable: poor floor plan, 1-bathroom in 4-bedroom home

Example: A home with only 1 bathroom for 4 bedrooms suffers incurable functional obsolescence

Tip: Functional obsolescence is WITHIN the property — think of features that are outdated or missing

External (Economic) Obsolescence

Details: Causes: nearby highway, airport noise, environmental contamination, economic downturn, zoning change

Example: A new landfill opens next door, reducing property value by $30,000

Tip: External obsolescence is ALWAYS incurable — the owner cannot fix factors outside the property

Net Operating Income (NOI)

Details: Gross scheduled income = potential rent at full occupancy. Operating expenses include taxes, insurance, maintenance, management fees

Example: GSI $120,000 - Vacancy $6,000 - Expenses $44,000 = NOI $70,000

Tip: NOI does NOT include mortgage payments, income taxes, or depreciation (capital expenditures)

Capitalization Rate (Cap Rate)

Details: To find Value: Value = NOI ÷ Cap Rate. To find NOI: NOI = Value × Cap Rate

Example: NOI = $50,000, Value = $625,000. Cap Rate = $50,000 ÷ $625,000 = 8%

Tip: The IRV formula: I = R × V (Income = Rate × Value). Cover what you need to find

Gross Rent Multiplier (GRM)

Details: To find Value: Value = Gross Rent × GRM. Quick screening tool — does NOT consider expenses

Example: Property sold for $300,000, monthly rent = $2,500. GRM = $300,000 ÷ $2,500 = 120

Tip: GRM is a rough estimate only — it ignores vacancy and expenses. Lower GRM = better investment

Cash Flow

Details: Positive cash flow = income exceeds expenses and debt. Negative = loss

Example: NOI = $70,000 - Debt Service $55,000 = $15,000 positive cash flow

Highest and Best Use

Details: All four tests must be met. Determines the basis for the appraisal

Tip: This is the foundation of ALL appraisals — the appraiser must first determine highest and best use

Substitution

Details: Foundation of the sales comparison approach — why we compare similar properties

Tip: Substitution underlies ALL three approaches to value

Supply and Demand

Details: Affected by: population growth, interest rates, employment, availability of land

Example: High demand + low inventory = seller's market with rising prices

Conformity

Details: Related to: regression (overimproved property loses value) and progression (underimproved gains value)

Example: A $500K home in a $300K neighborhood is worth less than $500K (regression)

Tip: Regression pulls value DOWN (overimproved). Progression pushes value UP (underimproved)

Contribution

Details: An improvement contributes value only to the extent the market recognizes it

Example: A $50,000 pool may only add $20,000 to property value — contribution = $20,000

Tip: Cost does NOT equal value — always measure by what the market will pay, not what was spent

Physical Deterioration — Curable

Details: Examples: painting, new carpet, appliance replacement, minor repairs

Example: Spending $5,000 on new paint adds $8,000 in value — curable and worth fixing

Physical Deterioration — Incurable

Details: Examples: aging foundation, structural settling, worn framing — age-life method used to calculate

Example: Building is 20 years old with 50-year life = 40% incurable physical deterioration

Tip: Age-Life Method: (Effective Age ÷ Economic Life) × Reproduction Cost = Depreciation

Functional Obsolescence

Details: Curable: can be fixed economically (update kitchen, add bathroom). Incurable: cannot be fixed economically (poor layout, low ceilings)

Example: A home with no garage in an area where all homes have garages = functional obsolescence

External (Economic) Obsolescence

Details: Causes: economic conditions, zoning changes, environmental hazards, nearby nuisances

Tip: If the cause is outside the property lines, it is EXTERNAL obsolescence and ALWAYS incurable

Step 1: Define the Problem

Details: Purpose could be: market value, insurance value, tax assessment, condemnation

Step 2: Gather & Analyze Data

Details: General: economic trends, neighborhood. Specific: property features, comparable sales, income data, cost data

Step 3: Apply Approaches & Reconcile

Details: Reconciliation is NOT averaging — appraiser weighs each approach based on reliability and relevance

Tip: Reconciliation uses judgment, not math — the most reliable approach gets the most weight

USPAP Requirements

Details: Requires: competency, objectivity, impartiality, no advocacy, proper reporting, workfile retention

Tip: USPAP is updated every 2 years. Appraisers must complete continuing education on USPAP updates

Absorption Rate

Details: Measures how quickly properties are selling in a market; indicates supply vs demand

Example: 60 homes sold in 6 months = 10 homes/month absorption rate. 120 listings ÷ 10/month = 12 months of inventory

Tip: Less than 6 months inventory = seller's market. More than 6 months = buyer's market

Comparative Market Analysis (CMA)

Details: Active = competition. Sold = market value evidence. Expired = overpriced examples. Pending = current market direction

Tip: A CMA is an agent's pricing tool — it is NOT an appraisal and should never be called one

BPO vs Full Appraisal

Details: BPO: used by lenders for portfolio review, short sales, REO pricing. Appraisal: required for most mortgage lending

Example: Bank orders BPO ($50-150) for a short sale review vs full appraisal ($300-500) for a purchase loan

Days on Market (DOM)

Details: Indicates market demand and pricing accuracy. Low DOM = high demand or good pricing

Example: Area average DOM = 30 days. A listing at 90 days suggests overpricing or property issues

Tip: Compare individual DOM to area average to assess whether a property is priced correctly