What is Real Estate Research, Anyway?
 Market Feasibility and Appraisals

At The Danter Company, we are a real estate research company specializing in market feasibility research.  One of the misconceptions that we battle most often within the real estate industry is that a market feasibility study is the same thing as an appraisal, or that an appraisal is really all you need to ensure that your project achieves success.  The following article addresses some details about the real estate research we do, with emphasis on the difference between market feasibility study and appraisals.

Q: What is Real Estate Research?

The broad answer is that real estate research is the process of gathering and analyzing data on real estate values and market trends. Within this broad category are several subcategories of research with different purposes and methodologies. The two most prevalent types of real estate research are appraisals and market feasibility studies. Other types of real estate research include rent and vacancy surveys, tenant or homebuyer preference surveys, and studies of zoning laws and trends.

The Danter Company emphasizes real estate research because we conduct several types of studies, including area apartment rent and vacancy surveys, tracking of single-family and condominium starts for certain areas, and surveys tracking tenant and shopper preferences. However, these studies were developed to help us do our main line of business more effectively: market feasibility studies.

Q: What is the Difference Between an Appraisal
and a Market Feasibility Study?

The difference can best be illustrated by the following comparison. The major question answered by a market feasibility study is "If I build it, will they come?"

The appraisal is designed to answer the question, "What will it be worth?" The appraisal is an estimate of the value of a property as of a certain date, while a market feasibility study measures expected market response. Because they measure different aspects of the market, each type of study needs a different methodology.

Q: How Does an Appraisal Work?

First, an appraiser, in conjunction with the client, will determine the purpose of the appraisal, which is expressed in a statement of purpose.

The purpose of most appraisals is to determine "market value" for the purpose of buying, selling, improving, or financing a project. As defined by the American Institute of Real Estate Appraisers in Appraisal Terminology and Handbook, market value is "the price at which a willing seller would sell and a willing buyer would buy, neither being under abnormal pressure."

Besides market value, an appraisal may also be undertaken to identify insurable value, condemnation value, liquidation value, or assessed value.

An appraiser generally uses three approaches to help determine the appropriate value, according to The Appraisal of Real Estate by the American Institute of Real Estate Appraisers: the cost approach, the income approach, and the market approach. Most appraisals will determine a value of a property using all three approaches and then establish a final value by carefully considering the purposes of the appraisal and the limitations inherent in each of the approaches:

• The cost approach involves identifying the replacement cost of a project minus depreciation.
• The income approach identifies the value which a property's net earning power will support.
• The market data approach is based on the sales of comparable properties. Each transaction selected is studied for its sales/asking price, the conditions influencing the sale, and the differences between the properties involved that would influence the value of the property being appraised.

An appraiser goes through considerable training to make these value judgments, and appraisers who are members of the American Institute of Real Estate Appraisers (or other appraisal organizations) are held to a professional code of ethics and standards.

Appraisals are important in the development process because they set value within the financing and acquisition process. No real estate transaction should take place without an appraisal to set appropriate values.

Next: How a Market Feasibility Study Works