Legal Definitions - market approach

The market approach is a fundamental method used to estimate the value of a specific piece of real estate, such as a house, an apartment building, or a commercial property. This valuation technique involves looking at recent sales of comparable properties in the same general area. A valuation expert or appraiser identifies properties that are similar in type, size, age, condition, and features to the property being valued. They then analyze the sale prices of these comparable properties and make adjustments to account for any differences, such as variations in location, specific amenities, overall condition, or the exact date of sale. The ultimate goal is to determine what a willing buyer would likely pay for the property in the current market, based on what similar properties have recently sold for.

Here are a few examples of how the market approach is applied:

• Residential Home Sale: Imagine a family wants to sell their four-bedroom house in a suburban neighborhood. To set a competitive and fair asking price, their real estate agent or an appraiser would utilize the market approach. They would research recent sales of other four-bedroom houses in that specific neighborhood, paying close attention to factors like square footage, lot size, number of bathrooms, and any significant upgrades (e.g., a new roof or a renovated kitchen). If a very similar house two streets over recently sold for $550,000, but it had a brand-new swimming pool that the family's house lacks, an adjustment would be made to account for that difference, potentially valuing the family's property slightly lower than the comparable sale.

  This example illustrates the market approach by showing how a specific property (the family's house) is compared to recently sold, similar properties, and how adjustments are made for distinguishing features (like a swimming pool) to arrive at an estimated value.

• Commercial Retail Space Valuation: A small business owner is considering purchasing a retail storefront in a bustling downtown area. Before making a substantial offer, they commission an appraisal to ensure they are paying a fair price. The appraiser would employ the market approach by investigating recent sales of other retail spaces of comparable size, age, and foot traffic in that same commercial district. If a similar storefront down the block sold last month for $1.2 million, but it included a long-term lease with a well-known tenant (a valuable asset), the appraiser would adjust the $1.2 million figure downwards to reflect the absence of such a pre-existing, income-generating lease in the target property.

  Here, the market approach is applied to a commercial property, demonstrating how its value is determined by comparing it to similar commercial sales and adjusting for specific income-generating features (like a tenant lease).

• Property Tax Assessment: A county government needs to periodically assess the value of all properties within its boundaries to calculate property taxes. For a new development containing several hundred newly built, nearly identical townhouses, the tax assessor's office might use a mass appraisal version of the market approach. If 20 of these townhouses have recently sold for an average of $380,000, the assessor could use this data to assign a similar assessed value to the remaining unsold or recently sold townhouses, making minor adjustments for premium locations within the development (e.g., a unit backing onto a park versus one facing a busy street).

  This example shows the market approach being used for a different purpose (tax assessment) where multiple properties are valued by comparing them to recent sales of similar homes in the same development and making minor adjustments for location differences.