Market value or comparable value?  What does that mean?  It means we form market value opinions.  Specifically, credible market value opinions.  Credible in this case must mean more than merely “…worthy of belief…” since USPAP contains no indication of who’s belief we seek.  It means, therefore, worthy of the market’s belief since the market is the model for market value.

So, when appraisers talk of market value or comparable value, we mean market value.  But don’t we use the sales prices of comparable as analogues for the subject’s market value?  Yes.  But there is a problem.   It is that the definition of market value begins with the phrase, “…the most probable sales price…”.  From the first class in real estate appraisal, our instructors taught us that price is not value.  Yet, according to the definition of market value, value is price.

But the key to this conundrum is “…probable…”.  It implies some type of analysis of a large number of sales.  We start the analysis with a large number of sales.  Then end the analysis with a small number of sales.  We start with all the data available to us (see USPAP SR1-4 and its use of the word all).  Then, via those analytics, we eliminate those sales that do not have the same physical, legal, and economic characteristics as the subject.

But why don’t we just start with the comparable sales?  Assume the subject is a 3/2 with a two-car garage.  It rents for $1,250 per month.  Down the street is a 4/3.5 and a 2.5 car garage, but it, too, rents for $1,250 per month.  Given it is a 4/3.5/2.5, all other things being equal, you’d eliminate it as a comp. But, assuming the larger house rents at market, by not eliminating it, you realize that it commands no more rent in the market than the smaller subject.  This is one indication (but a pretty telling one) that, were the site vacant, its highest and best use would not be the construction of a 4/3.5/2.5.  Why?  Because it commands no more rent in the market than the smaller house.

It also indicates two other market attributes.  It’s OK to use it as a rental comp to derive the subject’s market rental rate.  It’s also OK to use it as a sales comp to derive a market extracted GRM.  Both the monthly rental and the GRM are part of the analyses of market value via the Income approach.  So, if we were just looking for comps, we’d ignore these rental and GRM data.  That larger house did not fire as a comp even though it was.

Is our professional challenge to conclude market value or comparable value?  All other things being equal, it is to find market value.  We do that by first “…collecting, verifying, and analyzing all information necessary for credible assignment results…” (USPAP, ibid).  This gives us an idea of what is going on in the market as of the appraisal’s effective date.  Then, we analyze the physical, legal, and economic attributes of all those sales.  This allows us to eliminate those sales in which those differences are too large or too pronounced.  So, when we opine as to market value, when we follow this model, our opinion is market value, not comp value.  And to analyze market data properly we have to have an understanding of data science.  This allows us to communicate our opinion of market value to the client, rather than merely the post-adjustment value of the comparables value.

Editor’s Note: Our Guest Post this week is by Timothy Andersen, MSc. He is a USPAP expert and consultant to appraisers nationwide. To learn more about Timothy and the services he offers, check out his website, The Appraiser’s Advocate. Thank you to Timothy for his contribution to our effort to “update” valuation practice.