HOW TO IMPLEMENT THE MARKET APPROACH IN REAL ESTATE APPRAISALS

Introduction:

Real estate appraisals are essential in determining the fair market value of a property. Among various valuation methods, the Market Approach stands as one of the most widely used and trusted techniques. By comparing the subject property with similar properties recently sold in the market, this approach helps appraisers arrive at an accurate and objective assessment. In this article, we will delve into the intricacies of the Market Approach and outline the steps to implement it effectively in real estate appraisals.

Understanding the Market Approach:

The Market Approach, also known as the Sales Comparison Approach or Comparative Market Analysis, revolves around the principle of supply and demand. It assumes that a reasonable buyer would pay a price similar to what they would pay for a similar property. By analyzing recent sales of comparable properties, the appraiser attempts to determine the market value of the subject property.

Steps to Implement the Market Approach:

1. Define the Subject Property: Begin by clearly defining the property to be appraised. Take note of its location, size, features, and overall condition. This step lays the foundation for selecting appropriate comparable properties.
2. Gather Data on Comparable Sales: Collect relevant data on recently sold properties that closely match the subject property in terms of location, size, age, amenities, and condition. These comparable properties, or “comps,” should be within a reasonable proximity to the subject property and have sold within a specific time frame, usually within the last six months.
3. Adjust Comparable Properties: No two properties are entirely alike, so adjustments must be made to the comparables to account for differences in features and amenities. For example, if the subject property has an additional bedroom compared to a comp, the appraiser will adjust the sale price of the comp either upward or downward to account for this difference.
4. Analyze Market Trends: Understand the current real estate market trends in the subject property’s area. This analysis involves examining factors such as market demand, inventory levels, and average days on the market. These insights will help in determining whether the market is a buyer’s market, seller’s market, or balanced market, which can impact property values.
5. Weight the Comparables: Not all comparable properties are equally relevant or accurate representations of market value. Some may be more similar to the subject property than others. The appraiser needs to weigh each comp’s importance based on its proximity, similarity, and transactional characteristics.
6. Calculate the Market Value: After adjusting and weighting the comparable properties, the appraiser arrives at a range of values. This range provides a basis for calculating the final market value of the subject property. By considering the market trends and the specific adjustments made to the comparables, the appraiser determines the most appropriate value for the subject property.

Conclusion:

The Market Approach is a fundamental method used by real estate appraisers to estimate the value of a property objectively. By relying on recent sales of comparable properties and analyzing market trends, appraisers can provide an accurate and unbiased assessment of a property’s market value. Implementing the Market Approach requires a keen eye for detail, an understanding of the local real estate market, and proficiency in making accurate adjustments to ensure a fair appraisal. For buyers, sellers, lenders, and investors, a reliable and well-executed Market Approach provides invaluable insights into the true worth of a property.