How Estimates of Market Value are Determined for Residential Properties

MARKET VALUE

Market value is generally defined as the price a willing buyer would pay a willing seller for a property in its present condition with neither buyer nor seller under pressure to act (such as career relocation, death of a family member, divorce, etc.). A market value sale also is known as an arm's length transaction.

A number of factors may affect a residential property's market value, including:

• External characteristics - "curb appeal", home condition, lot size, popularity of an architectural style of property, water/sewage systems, sidewalk, paved road, etc.
• Internal characteristics - size and number of rooms, construction quality, appliance condition, demonstrated "pride of ownership", heating type, energy efficiency, etc.
• Supply and demand - the number of homes for sale versus the number of buyers; how quickly the homes in your area sell, and
• Location - desirability for a particular school district, neighborhood, etc.

THE SALES COMPARISON APPROACH

The most common way to determine the market value of a residential property is to use the sales comparison approach. This is the primary method used by professional appraisers to determine the market value of residential properties.

To determine an estimate of a property's market value, arm's length comparable sales are used. By examining recent sales of at least three properties in a general (or similar) neighborhood that are comparable in building style, size and construction, one can begin to get a good understanding of a residential property's market value. However, it is important to consider the circumstances of such sales - perhaps the seller was desperate to "unload" the home, or the buyer paid much more than the asking price because there were other interested parties. Market value and sales price are not always the same.

Comparable sales should include characteristics similar to a given property, such as lot sizes, square footage, home style, age, and location of the home. A new three-bedroom Cape Cod house may not be comparable with an older three bedroom split-level ranch, even if they are on the same street.

Since it may prove difficult to find an exact comparable sale, allowances must be made. To arrive at an estimated market value, dollar adjustments are made for differences between the property being valued (also known as the subject property) and the comparable properties that have sold.

Hypothetical Comparable Sales Analysis (Values are strictly estimates and should not be used in your analysis)
Attribute	Subject Property	SALE #1	SALE #2	SALE #3
Sale Price
Sale Date		Recent	Recent	Recent
Property Condition	Good	Good	Good	Good
Year Built	1997	1997	1997	1997
Square Feet	1,500	1,500	1,500	1,500
No. of Bedrooms	3	3	3	3
No. of Baths	1	1	1	2 ( - $____)
No. of Garage Spaces	2	2	2	2
Location	Avenue A	Avenue B inferior location (+$____)	Avenue C similar neighborhood	Avenue A
Lot Size	½ acre	½ acre	½ acre	½ acre
Basement	Full	Full	Full	Full
Adjusted Sale Price	(indicated value)

For example, assume that a residential property is a 1,500 square feet ranch with 3-bedrooms, 1 bathroom, full basement, and two-car garage on ½ acre of land. It was built six years ago in a nice neighborhood. Three recent arms-length sales are identified that appear to be comparable with the subject property. However, Sale #1 is in a less desirable (or inferior) location and Sale #3 has an additional bath. Sale #2 is almost identical to the subject property.

To estimate the market value of the subject property, one needs to determine how the differences between the subject property and each comparable sale property relates to prices at which they sold.In this case: Sale #1 is in a less desirable location, which lowered the sale price; and Sale #3 has an extra bath, which increased the sale price.

A grid, such as the one above, is helpful to arrive at the market value of residential properties. Because the subject property is not in an inferior location, Sale #1 should be adjusted to reflect what it would have sold for in the subject property's neighborhood. Sale #3 with an extra bath needs to be adjusted to the sales price of a property with only one bath. Because Sale #2 is almost identical to the subject property, no adjustments are necessary.

By adding and deducting these adjustments to the comparable sale, an adjusted sale price is arrived at for each sale.

A common mistake is to average the unadjusted sales prices to arrive at the market value of the subject property. This can yield widely varying results. Only the sales that are most similar to the subject property, and that have been appropriately adjusted, should be given the most weight.

Information from NYS Office of Real Property Services