Advantages of the Market Comparison Approach

Appraisers may compensate for some of the deficiencies of sales data on the basis of their general familiarity with real estate values. Provided that real estate sales meet minimum standards of acceptance, they offer a fairly objective means of estimating value. In fact, the advantages of the market comparison approach frequently more than compensate for sales data deficiencies.

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Current Prices Indicate Market Value. If three 2,000-squmare-foot houses in the same neighborhood of like construction and features sold for P60,000, P62,000, and P65,000 in the last six months, it is difficult not to concede that a similar property would have a value approximating P62,000 (provided that the properties are in similar condition). Sales prices of like properties are convincing evidence of market value. The public, the courts, and government agencies generally accept qualified market data as market value evidence. This is especially true if prices are independently negotiated by buyers and sellers who have no vested interest in the appraisal of another property.

Personal Bias of the Cost Technique Avoided. While the market approach has certain limitations, it should be judged relative to other approaches. The crucial problem is to rely on that appraisal approach which gives the strongest support to the final value estimate. For on analysis, each approach has inherent limitations. For example, the valuation of a 30- year-old house by the cost approach suffers from the difficulty of acquiring construction costs for a house built with building materials and equipment that are no longer available. The example illustrates the added handicap of estimating the loss in value from poor maintenance, neighborhood decline, and the lack of a modern floor plan and equipment. Comparable sales of similar older buildings would probably give a more accurate indication of value.

Frequently Sold Properties. The market comparison method is ideally adapted to the appraisal of frequently sold properties. In an active real estate market, the large number of available sales gives the market approach a clear advantage over the cost and income approaches. An active market allows the appraiser to select a group of highly comparable sales among different property types and neighborhoods. Such an analysis contributes to the accurate interpretation of current sales prices.

Sources of Comparable Sales Data

Under the market comparison approach, ac-curacy depends on securing valid real estate sales data. The main object is to obtain only bonafide sales that have been verified as an accurate indication of current market value. To ensure that a sale is bonafide, it is common to eliminate certain transactions which are not considered indicative of market value. Among the real estate sales considered invalid for appraisal purposes are:

1. Sales to or from government agencies.

2. Foreclosure sales or sales completed in anticipation of foreclosure or bankruptcy.

3. Sales between family members.

4. Sales between interrelated corporations.

5. Sales of partial or fractional interests.

Some of the rejections may be avoided by eliminating sales between parties who have the same name or sales between corporations known to have a common ownership.

With these qualifications, the appraiser has the option of obtaining sales from public, private, or commercial sources. A representative list of places to secure real estate sales information includes:

Public Sources Recorder of deeds.

  • Property tax assessor.
  • Tax commissions.

Private Sources

  • Real estate brokers.
  • Multiple-listing services.
  • Financial institutions.
  • Real estate developers.
  • Real estate contractors.
  • Real estate investors.

The public sources refer to local and national agencies that maintain a file of real estate sales incidental to their function. Be reminded however that condominium titles are also contained in the same public recording facility that of houses and other types of real estate. The recorder of deeds (in some states referred to as the registrar of deeds, the county auditor, or some similar designation) files deeds by book and page number. These are also identified alphabetically in the name of both the seller and the buyer. Since the public file usually includes a facsimile of the deed, deed books represent an excellent place to identify the minimum facts of the sale. Since deed records do not ordinarily show other essential facts, these records must be supplemented by a field inspection and verification of the sales price through interviews with the buyer, the seller, or the broker.

The property tax assessor and the state tax office maintain sales records to assist in the valuation of property for property tax purposes. Quite often the public may use these records to identify real estate sales.

Private sources include real estate brokers, savings and loan associations, and local banks that deal in real estate mortgages. Real estate developers, contractors, and investors who are actively engaged in producing and marketing real estate constitute other sources of sales data. Usually the appraiser must investigate many sources to obtain current information on real estate transactions.

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