Overview
Market Analysis of real estate looks to the prices of comparable properties as transacted in the market in order to determine a fair market price. In addition, it may include an analysis of economic factors and trends in order to estimate where those market prices may be moving.
Comparable Analysis
Comparable analysis seeks to find properties that are similar to the target property and have transacted recently.
Generally, a similar property should be
- Roughly the Same Neighborhood
- About the Same Size - properties that are not the same size can still be compared, if the analyst instead calculates a price per square foot of the property.
- Same Function. that is, a business property would price differently from a residential.
Adjustments
In order to get an accurate estimate of market price from a set of comparables, the number of comparables needs to be large enough to get a reasonable statistical bound on the average. When the number of comparaables is not large, analysts sometimes utilize the following.
- Factor Discount Rates - if a discount can be estimated for a given factor, such as size, one may be able to inlcude a larger set of properties by discounting the factor in question
- Financial Theory - if some feature of a property which is unique can be valued by some well established financial model, the analyst may decide to inlcude the unique property by valuing and unique feature separately, and subtracting it from the property price.
Income Analysis Corrections
The market comparable approach yields a price that is in some sense an average of the prices of comparable properties. If the analyst believes that the property has qualities that would yield either higher or lower cash flows than average, then the analyst can use the income valuation tools to price the difference of the two income streams and adding that to the price from the comparable analysis.