HEDONIC MODEL IN THE SALES COMPARISON METHOD

Hedonic Model in the Sales Comparison Method: Revolutionizing Real Estate Valuation in India

Real estate valuation in India has long been a complex endeavor, influenced by myriad factors ranging from location and amenities to market trends and economic indicators. Among the various valuation methodologies employed, the Sales Comparison Method (SCM) stands out as one of the most widely used approaches. However, traditional SCM often faces challenges in accurately capturing the nuanced value of properties, particularly in heterogeneous markets like India. Enter the Hedonic Model – a revolutionary approach that promises to enhance the precision and reliability of real estate valuations by dissecting property characteristics and quantifying their individual contributions to market value.

Understanding the Sales Comparison Method (SCM)

The Sales Comparison Method is a fundamental approach used by appraisers and real estate professionals to estimate the value of a property by comparing it to similar properties that have recently sold in the market. By analyzing recent sales data of comparable properties (comps), adjustments are made to account for differences in characteristics such as size, location, age, and amenities, ultimately arriving at an estimated value for the subject property.

Challenges with Traditional SCM in India

While SCM offers a straightforward framework for property valuation, its effectiveness can be hindered by the heterogeneity of the Indian real estate market. Factors such as diverse cultural preferences, varying levels of infrastructure development, and disparities in neighborhood amenities can make it challenging to identify truly comparable properties. Additionally, subjective adjustments made by appraisers based on their expertise and judgment can introduce biases and inconsistencies into the valuation process.

Introduction of the Hedonic Model

The Hedonic Model, a concept derived from hedonic pricing theory, seeks to overcome the limitations of traditional SCM by employing regression analysis to quantify the relationship between a property’s price and its underlying characteristics. Instead of relying solely on subjective adjustments, the Hedonic Model objectively evaluates the impact of individual features such as location, size, number of bedrooms, amenities, and environmental factors on property value.

Key Components of the Hedonic Model

1. Property Characteristics: The Hedonic Model dissects properties into their constituent characteristics, treating each attribute as a separate variable in the regression analysis. This allows for a granular examination of how different features contribute to overall property value.
2. Regression Analysis: Through regression analysis, the model determines the marginal contribution of each property characteristic to its price, controlling for other factors. By analyzing large datasets of property transactions, the model can identify patterns and trends that may not be apparent through