Estimating the market value of a proposed townhouse development
| Pages | 501-516 |
| DOI | https://doi.org/10.1108/14635789910294912 |
| Date | 01 December 1999 |
| Published date | 01 December 1999 |
| Author | Christian Janssen,Zan Yang |
| Subject Matter | Property management & built environment |
Practice briefing:
Estimating the
market value of
development
501
Journal of Property Investment &
Finance, Vol. 17 No. 5, 1999,
pp. 501-516. #MCB University
Press, 1463-578X
Received September 1998
Revised January 1999
PRACTICE BRIEFING
Estimating the market value of
a proposed townhouse
development
Christian Janssen
University of Victoria, Victoria, Canada, and
Zan Yang
Royal Institute of Technology, Stockholm, Sweden
Keywords Real estate valuations, Estimation, Linear models, Appraisal
Abstract An appraisal by an accredited appraiser is often necessary before a proposed development
can receive a commitment for financing from a financial institution. Such pre-construction appraisals
are often more difficult to complete than those where the subject property is already developed and
accessible for inspection. In this article we are performing a valuation of a proposed townhouse complex
prior to its construction. Hedonic estimation is used to estimate the market value of the proposed
development. The estimated value of the complex as a whole, and of the individual units, is compared to
the prices obtained as the townhouses were built and sold. Insights with respect to the feasibility of the
approach for the estimation of the gross retail value of proposed developments are discussed.
Introduction
Appraisers generally rely on the comparative market approach in the appraisal
of townhouses or townhouse developments. The value of the subject property
is established (estimated) by comparison to similar properties recently sold, the
comparables.
For appraisals, generally only properties sold are used in the comparison, but
real estate agents, listing a residential property for sale, often compare also
against properties currently for sale. The rationale here is that prices of properties
sold provide evidence of what purchasers were willing to pay and vendors willing
to accept. These are market prices. They are based on completed transactions
between the parties under conditions of a free market, those listed for sale
similarly provide evidence of what sellers are now willing to accept and
purchasers could now pay. These are also the properties against which a property
being listed for sale would compete. Thus they provide additional evidence of the
market, but asking prices of properties listed are pre-transaction prices. They are
not yet realized and do not yet represent market prices.
Comparisons are sometimes also made with expired listings. These indicate
what buyers were not willing to pay. The market comparison is intended to put
the subject property into the context of the market and to estimate its likely
Helpful comments by an anonymous referee are gratefully acknowledged.
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selling price if it were to be offered for sale and marketed in a manner similar to
those recently sold.
In the comparisons, adjustments are made for differences between the
subject property and the comparables. If a particular comparable had sold for a
given amount and was similar to the subject in all respects except for lacking a
garage, which the subject has, the subject ought to be worth as much plus the
value of the garage. The subject's market value would then be estimated at the
comparable's selling price plus some amount for the value of a garage.
The selling prices of the comparables are similarly adjusted for the features
in which they differ from the subject and the latter's selling price is then
estimated as the average (mean or median) adjusted price of the comparables ±
sometimes weighted average, if particular comparables are more comparable or
have had more recent observations than others.
There are some difficulties involved in thisapproach. First, the adjustments for
individual property features are difficult to obtain. Who knows whatthe market is
willing to pay foran extra 100 square feet,an extra bathroom, a finished basement,
or a two-car, as opposed to a one-car, garage? Second, properties may differ in
many respects that are noteasily quantifiable.How do you measure the advantage
of a superior floor plan,greater privacy or better views?
Despite these difficulties, the market comparison approach is the predominant
method used for arriving at a suitable list price for properties to be sold and for
estimating themarket value of properties to be financed. Hence it makes sense to
focus on this approach and explore waysin which it might be applied.
Regression analysis is a possibility in this regard. The resulting regression
coefficients provide estimates of the value of individual property features. This
offers a scientific basis for the price adjustments and does not rely on the
judgement and experience, or inexperience, of the appraiser or agent.
Regression analysis can also handle many more comparables than the few
generally used in comparative market analyses performed by real estate agents
or accredited appraisers.
In this paper, regression analysis is employed to estimate the market value
of a 16-unit townhouse development under construction in a residential
neighborhood in a North-American city. Data for townhouses sold during the
past year in a wide area of the city are used as comparable properties to develop
the regression equation. The equation obtained is then applied to the individual
units in the complex to estimate their selling prices. The sum of the prices for
the individual units represents the estimated market value for the complex as a
whole, its estimated gross retail value.
In the present case, the subject property was being constructed and offered for
sale during the period of the analysis. The sample data, however, include only
pre-construction observations. Thus our investigation is completed under the
same conditions as theappraisal for financing andunder the full reality of valuing
the project on the basisof constructiondrawings ratherthan a model home.
The ideas for applying regression analysis to the problem of estimating
property values are not new. One of the first, if not the first, to introduce this
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