Market, Comparative & Income Approaches

Market or Comparative Sales Approach
The market approach is based on comparison of the subject property to similar properties which have been sold in the same market. Similarities and differences must be noted in detail such as:
  • Conditions of the sale
  • Date of sale
  • Location of property
  • Physical characteristics
For investment properties, potential income should also be documented.

Conditions of the Sale
The conditions of the sale are extremely important when considering whether a property is comparable to the subject or not. If the parties are related, or special financing was obtained, or the seller was forced to sell by some condition of their life (a move, divorce, etc.) then the sale might have to be eliminated as invalid.

Remember the definition of market value, "the most probable price, in terms of cash, in a competitive and open market, assuming a willing and knowledgeable buyer and seller, allowing sufficient time for the sale, and assuming that the transaction is not affected by undue pressures."

Other Factors
Some factors like size or shape or location may have to be accommodated by adjusting the value of the comparable up or down to reflect the difference between that property and the subject. The comparable is always adjusted, never the subject property.

Possible Values
The market approach indicates a range of possible values, rather than a precise figure, especially if few sales are available or many adjustments have to be made. In Arizona, the market approach is the most widely used for residential property valuation. It is ideal for types of property which are regularly sold, and it may be the only valid approach for valuing properties which are very old, or for which reliable cost or income data is unavailable.

Income Approach
The income approach is used to value commercial or industrial properties, or properties which are bought and sold by investors primarily because of their income producing potential. This approach to value depends on reliable and detailed information on the income and the costs of doing business for a particular business or enterprise. This is referred to as the "income stream" of the property.

Approach Definition
The income approach defines value as "the present worth of future benefits of owning a property." These are composed of the annual income for an estimated number of years (called the economic life of the property) plus a capital amount representing land value or land value plus some remaining worth of the improvements. This approach emphasizes investment components rather than physical components of a property.

Steps in the Income Approach
The steps in the income approach are:
  1. Estimate potential gross income (PGI).
  2. Deduct vacancy and collection losses.
  3. Add miscellaneous income to derive effective gross income (EGI).
  4. Deduct operating expenses to derive net operating income (NOI).
  5. Select appropriate capitalization rate and method.
  6. Develop an estimated value.