Valuation and market analysis
The three appraisal approaches, when each one fits, and how to adjust comparables.
Valuation in one paragraph
Appraisal vs CMA or broker price opinion
| Appraisal | CMA or BPO | |
|---|---|---|
| Who prepares it | A state licensed or certified appraiser | A real estate licensee |
| Main use | Lender's opinion of market value for a loan, court or tax matter | Helping a seller set a list price or a buyer shape an offer |
| Method | Can use sales comparison, cost and income approaches, then reconciles | Mostly recent comparable sales, actives and expireds |
| NJ rule | Only an authorized appraiser may perform one | Written CMA must state it is not an appraisal |
| Who pays a salesperson | Not applicable | Only the employing broker, never the consumer or bank directly |
Valuation: 4 rules to memorize
Sales comparison for homes.
Recent sales of similar properties, adjusted for differences.
Income for rentals.
Value = net operating income ÷ cap rate.
Cost for new or unique buildings.
Replacement cost minus depreciation, plus land value.
Adjust the comp, never the subject.
Better comp, subtract. Worse comp, add.
Valuation, explained
A licensee's comparative market analysis or broker price opinion helps set a price, but it is not an appraisal. When adjusting comparables, always change the comparable: if it has a feature the subject lacks, subtract that value from the comp's price.
Depreciation comes in three flavors. Physical deterioration is wear and tear, like an old roof. Functional obsolescence is a design problem inside the property, like a bedroom you can only reach through another bedroom. External, or economic, obsolescence comes from outside the lot, like a new highway next door, and the owner usually cannot cure it.
An appraiser does not average the three approaches. In the final step, reconciliation, the appraiser weighs each approach by how reliable it is for this property and picks one value. For small rentals, a quick shortcut is the gross rent multiplier: divide a comparable's sale price by its monthly rent, then multiply the subject's rent by that number.
In New Jersey, a CMA is not an appraisal, and a written CMA you give a consumer must include a statement saying so. The Commission treats a broker price opinion the same way. A salesperson can be paid for a CMA or BPO only through their broker, never directly by the consumer or a bank. Separately, a lender must give a mortgage applicant a copy of the appraisal promptly, or at least 3 business days before closing, whichever is earlier.
How the exam tries to trip you up
- The question gives a comp with a feature the subject lacks and four answers that adjust the subject. Adjust the comp only. Comp better, subtract. Comp worse, add.
- An answer choice says the appraiser averages the three approaches. Wrong. Reconciliation weighs them based on which is most reliable for that property type.
- A noisy airport or highway nearby is external obsolescence, not functional. Functional is a flaw inside the building, like one bathroom in a five bedroom house.
- Your seller asks for an appraisal and you hand over a CMA. In New Jersey a CMA is fine, but it must say in writing that it is not an appraisal.
Valuation practice questions
Which appraisal approach is most reliable for an older single-family home with plenty of recent sales nearby?
Valuation flashcards
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All 7 terms at a glanceShowHide
- CMA
- A licensee's comparative market analysis. Not an appraisal.
- Depreciation
- Loss in value from physical deterioration, functional or external obsolescence.
- Cap rate
- Net operating income ÷ value.
- Reconciliation
- The final appraisal step: weighing the approaches by reliability to reach one value, not averaging them.
- Functional obsolescence
- Loss in value from a design or layout flaw inside the property, like an outdated floor plan.
- External obsolescence
- Loss in value from outside the property, like a new highway. Also called economic obsolescence. Usually incurable.
- Gross rent multiplier
- Sale price divided by gross monthly rent, used to estimate value for small rental homes.
Valuation: common questions
Sources and further reading
More Valuation questions in the app
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