Appraisers have been taught to first analyze the subject property. Is this correct? What would an economist do? Would she analyze the property, or figure out the market?
Well yes, an economist would try to figure out a market. First, it’s important to consider what type of market we are talking about. What are the characteristics of a market? Economists say two things are important: 1) the number of buyers and sellers; and, 2) the sameness (or homogeneity) of the product. Most ‘asset’ types have some heterogeneity, especially so for real estate.
So, it is important to identify the characteristics of the property, in order to help identify the market. However, (and this is a BIG however) valuation is not primarily about researching a property. Valuation is about researching the economics of a market. (The client tells us what to value. The property is identified for us.) Our job is to depict the market. Valuation is a two-step process!
Step 1. Depict the complete relevant market segment.
Step 2. Position the subject in that market segment.
In the curriculum of the “new valuation modeling paradigm”[1] we emphasize the importance of separating Step 1 from Step 2. Why? Because we study and research, analyze, evaluate and explain the complete market, not the property.
In the traditional, old way of valuation, it was difficult to separate thinking about the market from thinking about the subject. In the past, ‘picking comps’ was about minimizing adjustments for dis-similarities.
Today, the new valuation modeling paradigm, Evidence Based Appraisal (EBV)© — distinguishes clearly and explicitly between measuring the subject and measuring the market. We measure the subject solely to help identify what we are really studying: The competitive market segment (CMS)©.
In summary, what asset analysts and appraisers do is research and study a specific market. To study a specific market, we must define and delineate that CMS©. Asset analysts describe (quantify and parameterize) the subject. But the sole reason for this describing is to help depict and quantify the data set – the frame of data identified as being useful to quantify the market. This we call “adjustments.” We adjust to place, or compare the subject features to the market.
USPAP Rules do not define what is a market, (although market value is defined). In fact, I am unable to find any place where these “congressionally chartered” quasi-governmental USPAP standards require the analyst to identify the relevant market.
USPAP Rules do however say — “an appraiser must … identify the characteristics of the property. These include the physical, legal and ‘economic’ attributes; property interest, or other modifications to the specific property rights.
What would an economist say? I believe that most microeconomists would say that the subject property is just that – one item in a group of items that compete for the buyer’s attention!
So, does an appraiser analyze a property, or analyze a market? It’s both. But the purpose of each is hugely different!
The purpose of depicting the property is to make sure the right question is asked. It’s a study of what is. It’s also attention to what the client wants studied.
The purpose of appraisal is to analyze a market segment, given the property features identified.
[1] Marvin Wolverton, MAI, PhD, in The Appraisal Journal, Spring 2014, letters to the editor. Dr. Wolverton was the author of the Appraisal Institute book: An introduction to Statistics for Appraisers.
March 13, 2019 @ 7:31 am
I agree that what appraisers really do is analyze a market and if we do that the appraiser should arrive at a “Range of Values” for the market not a specific value and of course that is not acceptable to our client the lender. To arrive a specific value the appraiser must identify a single item in that market.
March 13, 2019 @ 9:56 am
You are absolutely right!
The culture of expectations of our clients, regulators, and old education — is the delivery of a point-number opinion, even when such a most probable value does not mathmatically exist!
This is an important point, that we will address head-on, perhaps in a coming webinar.
Thank you.
April 1, 2019 @ 8:15 pm
Simply put, as we struggled with an appraisal today in our banking review function, “what can you expect for $xxx,xxx in this particular market with this vintage property?”. Buyers set values, not appraisers. To rely on appraisers to set adjustment levels may be misleading. Breaking down property to economic units provides a perspective outside of conventional appraisal thinking. Conventionally defined Neighborhood influences sometimes do not coincide with buyer behaviour, and when an appraiser puts on their economist hat it adds value to their service.
March 13, 2019 @ 3:50 pm
Pratt, Excellent observation to identify the single item within the market. George’s point of minimizing dis-similarities is so true as large adjustments are traditionally frowned upon. An analysis of the Competitive Market Segment can truly ID outliers and help show the magnitude of adjustments required. This will help narrow a range to something that is supportable and keep participants in a transaction/case/etc at bay, lenders and others that are chasing a number (high or low).
March 21, 2019 @ 11:37 am
Good article. What the appraiser should do is research the value trends for the state, county, and market area over the last 30 days, 2, months, and 12 months. add to the addendum. All this data is readily available on the MLS., or Ca. assoc. of Realtors web site. Attach a trendvision (spread sheet on sales/listings,etc.), report from mls on to the addendum of the report. Then complete an absorption rate for the neighborhood. Regarding subject, the appraiser needs to note what subject’s dominate features are (View, Bedroom count, etc..) in the sales comparison comments…. Reconciliation, I will give the adjusted value range of the sales, the unadjusted value range price per sq.ft., range, and the why most weight was given to a comparable in the final value conclusion. Example.. The price per sq.ft. range from the closed sales is $100.00 – $115.00. The adjusted price range for the comparable sales is $100,000 – $115,000. Most weight is given to sale..#2,, then why…
March 21, 2019 @ 8:13 pm
I sense though that we may be missing the author’s primary point. The three contributors above mention a number of general concepts such as “analyze a market” and “within the market” and “the market area” without specifically hitting upon the author’s primary point. His primary point was identifying and analyzing a market segment. A market segment is where the most relevant statistics will be found. For example, if I may simplify, suppose the subject is a 4-bedroom, 2-bath property. The market segment would then be all 4-bedroom, 2-bath properties in a certain geographical area. Anything more would be too general. It wasn’t until I had been introduced to the author a few years ago that the concept of “market segment” first became a primary focus for me.
April 7, 2019 @ 5:04 am
All great points! Particularly, that it is the market segment you need to focus on. The correct market segment! Thanks, GEORGE…
January 19, 2022 @ 9:37 am
Yes. Today, there are a number of clean analytic tools specifically for data selection for similarity. These are well known in today’s data science, econometrics, and marketing analyst worlds. But are effectively ignored in the ‘believability’ world of “trust me” appraisal education.
Its what peers do, and clients expect!
Why change now?