2.1 Market-Data-Approach.pptx

none

1. Market Data Approach

2. In real estate appraisal, there are three (3) basic approaches for valuing property:   – Market Data Approach or “Sales Comparison” – Cost approach -- Income approach

3. Valuation Approach #1: The Market Data Approach ( “Sales Comparison” Approach)

4. Basic concept:   The Market Data approach is based on the economic principle of –   “Substitution” — if a thing can be substituted for another, then their values will be comparable. Hence, the value of a property will be comparable to that of similar properties with similar qualities. The principle of Substitution recognizes that a typical buyer will compare asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost. In the Market Data Approach, the appraiser attempts to interpret and measure the actions of parties involved in the marketplace, including buyers, sellers, and investors.  

5. Before the advent of professional appraisers, the quick approach done by real estate agents for valuing real estate was to prepare a competitive market analysis (CMA). In a CMA the value of a property is estimated by comparing it to the sale price of similar properties in the same area. But a CMA is just a “snapshot” because not all similar properties are “exactly similar.”

6. A CMA done by a real estate agent is not a formal and professional appraisal. It could also have a bias since a CMA done by a real estate agent aims to persuade an owner to sell the property at a target pricing level deem by the agent marketable. Thus a CMA can be a guide but should never be presented as an appraisal. The appraisal prepared by a professional appraiser which emulates the CMA method is formally called the “Market Data Approach.” It is also popularly known as the “Sales Comparison Approach.”

7.   The Market Data Approach is more sophisticated and reliable than just a CMA prepared by real estate agents. The Subject property is compared to recently sold comparable properties. However, because no two properties are exactly alike, the sales prices of the comparable properties are carefully analyzed and appropriately adjusted up or down for each of the differences between the subject property and the comparable properties.  

8. When comparing different properties, not just the physical differences in the properties, such as the actual structures, their ages and conditions, compared, but also what property rights are being transferred or were transferred in the comparable properties, and also any differences in encumbrances between them. For instance, is a fee simple title being transferred, or are there any easements or deed restrictions on the subject property or on the comparable properties?

9. Data collection methods and valuation process The availability of market data is essential. Market data can be prices, costs, or offers. Market data is an indicator of market value which is defined as the most probable price at which the property will sell, not necessarily the average or the highest price. The market value is considered the cash price, so it does not take into consideration any financial incentives or financing arrangements.

10. Data is collected on recent sales of properties similar to the Subject. Ideally, only SOLD properties may be used in an appraisal as they represent amounts actually paid or agreed upon for properties. However, in the Philippines, the source of reliable market data is limited.

11. Although real estate transactions are required to be recorded with the BIR and the LGU for the payment of transaction taxes, these records are confidential and not available to the general public. Furthermore, many transactions are under-valued . Other alternative sources of reliable market data must therefore be found in the private sector -- buyers, sellers, real estate brokers and/or agents, appraisers, and so on.

12. Important details of each comparable sale are described in the appraisal report. Since comparable sales are not identical to the subject property, adjustments must be made for date of sale, location, style, amenities, square footage, site size, etc.

13. 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.

14. Likewise, if the comparable is inferior to the subject in an aspect, then an upward adjustment for that aspect is needed. The adjustment is somewhat subjective and relies on the appraiser's training and experience. 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 yield different indicators and these have to be reconciled.

15. Terminologies Subject – refers to the property to be valued .   Comparable – refers to other properties (the more the better) which can be compared “apple-to-apple” with the Subject because they have closely similar features.   Elements of comparison - are the various characteristics that are commonly comparable between the various properties being considered such as price, property rights, financing terms, conditions of sale, market conditions, location, physical and economic conditions, etc..  

16. Units of comparison – factors commonly found in the comparables , price per square meter; net income multiplier; etc..   Market price - is the price that the comparable property was sold for; it may be more or less than the market value, particularly if either buyer or seller needed to complete the transaction quickly, or if the transaction was not at arm's length, such as a sale between relatives or friends.  

17. Market cost - is what it would actually cost to buy the land and build the structures. Market value and market cost may not be the same; it is rarely the same for improvements to the property. For example, paying Php 200,000 to add a new addition probably will not increase the market value by Php 200,000. Market cost estimates are partially needed to make adjustment values upon comparables .

18. Steps in the Market Data 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.g., sales price per square foot), and develop a comparative analysis for each of the comparables .

19. 4.  Compare the subject and comparable sales according to the elements of comparison and adjust as appropriate 5.  Reconcile the multiple value indications that result from the adjustment (upward or downward) of the comparable sales into a single value indication 6. Units of comparison – are the components or units that allow quantification of the elements of comparison, such as price per sq. meter, rent multiplier, income ratio; density measures;

20.   Example of Elements of comparison and Units: Unit Location : Distance from amenity km. Site specific data : High vantage point, nice view, etc. % Agri land – existence of irrigation % Physical characteristics Number of bedrooms, garage, etc. PhP value Allowed Use Level of commercial allowed C-1, C-2, etc. % or Php Height limit % or Php Economic characteristics Land with coconut vs. fruit trees % or PhP Neighborhood data Surroundings clean, well-lighted, safe etc. % Conditions of sale Terms of payment, option, escrow, etc. PhP value

21. Methods of Comparison   There are two basic ways to compare market data between a Subject and a Comparable:   Review and intuition or “observation” method; and Adjustment grid data analysis   The Review and Intuition method is a simple approach. It does not require any deep analysis, just a simple comparison between the two properties. From experience, the Appraiser makes a value judgment and a declaration of value based on his observations past and present. It is intuitive, not testable. No serious computations are needed.

22. The Adjustment grid method is a more sophisticated technique. It is systematic and minimizes risk. It is also more logical and allows the appraiser to back up his indicated value by presenting the logic he used in arriving at the estimate. The adjustment grid is a worksheet where the elements of comparison are arrayed and adjustments are made.

23. The steps in the Adjustment Grid method are as follows:   Comparables are arrayed in a table horizontally Common elements of comparison arrayed horizontally; usually price is given. Adjustment on value in terms of percentage or absolute amounts developed Adjustments are applied to make comparables similar to the subject property

24. Adjustment rules:   If the comparable is inferior , the market price is adjusted upward, adjustment is “plus.” If the comparable is superior , the market price is adjusted downward, adjustment is “minus.”

25. The adjustment rules can be confusing. But the simple rational is this: The comparable’s value is adjusted to make it “equivalent” to that of the Subject property.   If a feature or element in the comparable property is inferior, then an adjusting value must be added to it to level up with the Subject. If the feature or element is superior, then an adjusting value must be deducted from it to level down with the Subject.   To better understand this methodology, a simple example is presented below:

26. The Appraisal Assignment:   Appraiser was asked to value a 2BR house in a subdivision made by Camella . After doing research, he saw 3other 2BR homes of the same model, and lot sizes, with offering prices and features as follows – Chouse#1 – P2.5M; is one km from the park, has one-car garage and is 5 years old. Chouse#2 - P2.7M; is 1.5 km. from the park, has one-car garage, and is 2 years old. Chouse#3 - P2.6M; is 2 km from the park, has 2-car garage, and is brand new.  

27. From research, he found the homes have all the same lot size and the current value of the lot is P 1.2M. Proximity to the park which has a beautiful clubhouse is considered a premium and a half-km differential results in a 5% price differential. The current cost of building an extra one- car garage is P200,000. Assume a useful life of 50 years.

28. Notes:   The lots of these houses currently sell for P 1.2M. From CHouse#3, a brand new home costs (P2.7-P1.2) = P1.5M A depreciation period of 50 years is assumed. Thus average annual depreciation is P1.5M/50 or P30,000/year.   Since the prices given are offering prices (ceilings), I recommend a 5% reduction for negotiation. Thus the indicative market value for the Subject House is 95% x P2.87M or about P 2,725,000.