Market Analysis

Overview

Market Analysis 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

One of the key ways to use market analysis in valuation is to find properties that are similar to the property in question that have transacted at some time recently in order to use though prices as a guide to gussing a market price for the property in question. Of course, the challenge is in the interpretation of what makes a similar property.

Generally, a similar property should be one in roughly the same neighborhood, of about the same size, and same function. (that is, a business property would price differently from a residential).

Some of the factors can be factored out of the analysis. For instance, it is typical to price the price per square foot for a property, rather than the total price. This normalization partially obviates the need for finding properties of the same size.

Other factors can be adjusted in order to make the comparable study an apples to apples comparison. For example, if possible, an analyst can create a set of discounts to discount a price for defects, such as age or other. If the an appropriate discount can be found, then the discount can be applied as an adjustment to price for the list of comparables in order to remove factors such as age from consideration.

Of course, in order to get a fair estimation, one needs a large sample size. As such, there is a tradeoff between finding closely comparable properties and creating a large sample size.

Prices may need to be adjusted in order to do an apples to apples comparison, if there are additional terms in one sale that are not existent in another. This may require using finance theory to price the additional terms of the contract and adjust the raw price. However, the specific terms of each sale may not be available and should be treated as an unknown factor.

Automating Comparable Analysis

If one has a large dataset of properties with property characteristics and prices, one may create a procedure to automatically finding the closest properties.

for example, suppose one has



Once one has raw data, one may need to adjust the price in order to reflect terms in the contract for each property, if available.



nearest neighbor kernel

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.