Market Analysis for Real Estate Appraisers – Part 1
This is the first part in a 5 - part series on Market Analysis for Appraisers. A new part will appear each day.
Einstein said it best … “in order to solve a problem, you must be thinking at a higher level then you were when the problem was created.” Market analysis is a problem appraisers face with every assignment … filling out the form or writing the narrative is part of reporting your conclusions, but is not the appraisal.
"An appraisal is the act or process of estimating value and since appraisers must consider value within the framework of the local real estate economy, market analysis is essential to the appraisal of real estate. The appraiser’s task is to read the market and then develop an opinion of value for a property within the current context of its market environment."
Market analysis is more than just understanding supply and demand. In depth, it considers affordability, highest and best use, timing for proposed projects, the impact of future events, etc. In direct sales comparison, market analysis helps determine the impact of changes in the market since the time of comparable sales and if adjustments for those changes are warranted.
USPAP Standards require the appraiser to analyze the market with respect to trends (General Data), supply and demand (Competitive Market Environment) along with indicators from comparable data (Specific Data) to determine the impact and relevance of each to the subject property. When you’re completing the appraisal report, what type of analysis are you doing to answer those and other questions?
We all like to think that coming to the right or at least supportable value conclusion is the task at hand however the real question being asked of any appraiser is “what is the subject property worth in it’s current market environment and what trends are impacting that value or may affect it in the future? Not an easy task by any measure, but definitely what the client really needs to know.
So how do we determine market value with respect to market analysis? In order to understand the present (and glimpse the future) you need to understand the past. We really don’t know where we are unless we know where we’ve been and understand how we got there.
Newton understood the laws of physics and how one action causes a reaction. Those same principles apply to the economy and therefore to housing. Something happens and it serves as a catalyst for something else. As an example, employment generally has a relationship to population. More employment, more people move to the area for jobs and population increases. Population increases and generates demand for housing. Demand for housing, more construction jobs, more retail activity, more retail jobs, more support jobs and the cycle continues.
In the next segment, we’ll take a look at Cause and Effect – Identifying trends and relationships. To read part two "click here"
AUTHOR: Patrick Egger, Stewart Title of Nevada, is a Certified General Appraiser and the creator of several Real Estate CE Classes including "DeMystifying the Appraisal - Appraisal Techniques for Real Estate Agents" and “Understanding the Las Vegas Marketplace” … Market Analysis for Real Estate Professionals” from which this article was excerpted. He also has his own blog - Intouch. Contact: [email protected]