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Market Analysis Approach.  A Heresy!  Who does he think he is?

Everyone knows there are three approaches.  Everyone.

It’s in the book.  It’s in the classes.  It’s in USPAP.  Clients require it.  It’s in state regulations.  It’s the law.

It’s not true. There are other ways.  It’s not true . . .

It depends.  It depends on the type of value you are seeking.  It depends on what you call it. It depends on the availability and type of data.  Giving something a label does not create truth.  It gives it a name.

Value-in-Use, the approach focuses on productivity or utility.  It remains required in some statutory or accounting contexts.  Similarly, accounting book value is not market-based.  Allocation, extraction, and residual approaches often work in a stand-alone manner, even if called by a different name, such as method, technique, model, algorithm, steps, process, or procedure.

I have often used the subdivision (development) approach for raw land and for these types of jobs.  Investment value is similar to value-in-use, except for investment analysis.  The gross-rent-multiplier, clearly an income-focused tool, is simply defined away as a sales comparison method.  DCF (Discounted Cash Flow) was separately recognized and named an approach.  But it later moved into the income approach definition.  AVM methods are “statistical” or machine-learning approaches.  The repeat-sales approach is used by AVMs by price-indexing, then applying a prior subject sale to the current value.

A rose by any other name stinks.

One appraisal organization simply calls the three approaches “a philosophy,” not alternative models.

I, as an appraiser, specialize almost entirely in view value.  Typically, one neighbor obstructs or interferes with the view of another neighbor.  I do not do cost, income, nor comparable comparison.  The best descriptive I can think of is “market analysis approach.”  The closest description in appraisal literature or appraiser curriculum is called “grouped-pair comparison.” The traditional appraiser is admonished to be careful in getting 4 or 5 comps with just that one feature in difference.  Standards support the grouped approach because it is a recognized “method or technique” approach, method, or procedure.

The difference between these two approaches is that market analysis does a much more defined and detailed identification of the two groups.  In EBV (Evidence Based Valuation) we apply the “five dimensions of similarity” in place of the traditional 10 “elements of comparison.”  The traditional legacy elements work well for personally picked comparables.  They do not work well for identifying and delineating market segments.

The five dimensions of similarity are structured for :

  • Market analysis, not comparing comps;
  • Mathematical independence from each other;
  • Minimizing confounding and correlated variables;
  • Maximizing clarity for visualization and data analysis.

The market analysis approach works well with modern data-saturated realities.

  • It integrates the “three approaches” and other methods, procedures, and techniques as above.
  • It segments the data to enable the correct model/algorithm and correct visualization/graph.
  • It clarifies the analyst’s modeling decisions, and enables understandable explanation.

Appraisal is market analysis.