The “market approach” or the “market data approach” is an appraisal method used to determine the fair market value of a real property by analyzing sale prices of similar properties. Under this appraisal method, parcels are identified as having similar characteristics to the subject parcel and then adjustments made for location, time, and topography, to arrive at a “benchmark” valuation.
The market approach is widely accepted and is a reliable method to estimate the fair market value of a property, provided that there is sufficient data available.
Sahalee County Club, Inc. v. State Bd. of Tax Appeals, 108 Wash. 2d 26 (1987):
“Fair market value is determined by one or more of three general methods: market data, cost, and income capitalization. The market data approach involves appraising property by analyzing sale prices of similar property. Of the three methods, the market data approach is the most reliable, as long as adequate data is available. The second method, cost, can also take the form of cost less depreciation or reconstruction cost less depreciation. This approach estimates what it would cost a typically informed purchaser to produce a replica of the property in its present condition. The cost approach usually involves adding an estimate of the depreciated reproduction cost of the property’s improvements and buildings to an estimated value of the land if vacant. Finally, fair market value can be estimated through capitalization of income. Under this method, value is assumed to be approximately equal to the present value of the future benefits of property ownership. Application of the appropriate annual rate of capitalization to the forecast of annual net income generates an estimate of that present value. The final step in the appraisal process is the reconciliation of the values determined through the different methods outlined above. Usually, more than one method is employed, even if only as a check on accuracy. These methods usually produce a range of estimates. The appraiser calculates a final value estimate by placing greatest emphasis on the value generated by the method deemed to be most reliable.”