How To Determine the Value of a Property Using the Comparison Approach

Understanding the market value of a property to purchasing or selling a property. Knowing this information is also useful to a homeowner contemplating improvement or renovations. It is also useful to judges who attempt to determine the appropriate division of assets during a divorce. Mortgage companies need this information as well as government officials when they determine the cost of acquiring a right of way. Because properties are unique, they need to be estimated or the cost approach needs to be used. For many occasions an informal method of valuing a property is used. Talking to the neighbors, real estate agents and collecting date from the paper can help one estimate the value of their property However judges, lenders and the government do not except these informal estimates. They demand the formal appraisal, where the properties valuer is reached using a methodical collection and analysis of relevant market data.

By definition an appraiser is an unbiased written estimate of the market value of a property, (AKA subject property). The appraiser submits their written report to their client. This report gives the appraisers value of the property and the reasoning for that value. Fair market value of a property is the most probable selling price assuming “normal” sales conditions for a given property. These should not be influenced by the buyer’s investment value which is the maximum they are willing to pay for the property or the seller’s investment value which is the minimum they a willing to accept for the property. Market value is estimated from observed transaction of similar properties which have sold. Personally, I like to use three through five properties which have sold within the last six months or a year if need be. I use sold properties because the price of a property on the market value is yet to be determined. You always adjust the properties you are comparing to the subject property because they have sold and the market value is determined.

For an appraiser there are valuations which we do not need to discuss in detail here.

Identify the Appraisal Problem

• Clients & intended user of the appraisal
• Intended use of the appraisal
• What is the purpose of the assignment
• Identify the effective date of the valuation
• What are the relevant characteristics of the property
•  What are the important assumptions and conditions of the assignment

What is the required scope of work

Collect the needed data and describe the property

• Market area data
• Characteristics of the region, city, and neighborhood
  • Subject property data
• Site, building, location
  • Comparable property data
• Market information on all the comparables

Data Analysis

• Market analysis
• Supply, demand and marketability studies
  • Highest and best use as though it were vacant
  • Highest and best use as currently improved

Determine the lands value

Apply the three approaches used to valuate property

• Sales comparison approach     Indicate the property’s value
• Cost approach    Indicate the property’s value
• Income approach    Indicate the property’s value

Reconcile the three approaches

Report final value estimates

That is the text books approach to explaining how to estimate a property’s value

I will use excel and make up three comparison properties and do the math for an example:

Comparison value of xyz propoerty
	Square footage	Bed rooms	Baths	Garage	Sell price	Price per Foot	Adjusted price
subject	1870	3	2	2	?
Comp 1	1750	3	2	2	$675,000	$385.71	$676,870.00
Comp 2	1900	3	2	2	$750,000	$394.74	$738,181.82
comp 3	1650	3	2	2	$650,000	$393.94	$736,666.67
						Summed	$2,151,718.48
						Divided by number of comparisons	$717,239.49
						The estimated price is	$717,239.49

To calculate the price per foot simply divide the price by the square footage.

To calculate the adjusted price, add the price then ad or subtract the cost of adding or subtracting the footage to make them have the same size.