Market Data Approach

In real estate appraisal, there are three (3)

basic approaches for valuing property:

– Market Data Approach or “Sales

Comparison”
– Cost approach
-- Income approach
Valuation Approach #1: The Market Data
Approach ( “Sales Comparison” Approach)
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.
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.”
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.”
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.
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?
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.
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.
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.
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.
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.
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.
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..
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.
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.
Steps in the Market Data approach

1. Research the market to obtain information pertaining to

sales, and pending sales that are similar to the subject
property
2. Investigate the market data to determine whether they are
factually correct and accurate
3. Determine relevant units of comparison (e.g., sales price
per square foot), and develop a comparative analysis for
each of the comparables.
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;
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
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.
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.
The steps in the Adjustment Grid method are
as follows:

a. Comparables are arrayed in a table

horizontally
b. Common elements of comparison
arrayed horizontally; usually price is
given.
c. Adjustment on value in terms of
percentage or absolute amounts
developed
d. Adjustments are applied to make
comparables similar to the subject
property
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.”
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:
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.
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.
Solution using the Adjustment Grid Method

Element of Comparison Comp Comp House Comp SUBJECT

House#1 #2 House #3

1. Offer price (Asking) P 2,500,000. P 2,600,000. P 2,700,000. To derive

2. Location from park 1.0 km 1.5 km 2.0 km 1.0 km
3. Garage One-car One-car Two-cars Two-cars
4. Age of the house 5 years old 3 years old Brand new 2 years old

ADJUSTMENTS
1. For distance to park 0% (same as Inferior +5% Inferior +10%
subj)
2. For garage Inferior + Inferior Same, no adj.
P200K +P200K
3. For age Inferior Inferior Superior -
+3x30K +1x30K 2x30K

Adjusted Values P 2,790,000. P 2,960,000. P2,910,000. Ave=

P2,886,666.
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.