how the market approach works
as its name suggests the market approach seeks to answer the question what is the fair market value of this asset to answer this question the valuator needs to survey recent transactions involving similar assets because these assets are unlikely to be identical to the one being valued various adjustments will need to be made in some markets such as residential real estate or publicly traded shares there is often ample data available making the market approach relatively easy to employ in other markets such as shares in private businesses or alternative investments such as fine art or wine it can become quite difficult to find comparable transactions in situations where limited data is available the valuator may need to rely on alternative methods such as the cost approach or discounted cash flow analysis dcf the primary advantages of the market approach are that it is based on publicly available data on comparable transactions as such it can require fewer subjective assumptions than alternative approaches the primary disadvantage of the market approach is that it can be impractical in situations where few if any comparable transactions exist such as in the case of a private company operating in a niche market with few competitors example of the market approachto illustrate suppose you are in the market to purchase a new apartment you find a listing for an apartment in your preferred neighborhood being offered for 200 000 the unit is a 1 bedroom 1 000 square foot apartment with 1 bathroom it is in good structural condition but requires some minor renovations although it is in a desirable neighborhood its view is obscured and it does not have an in suite washing or drying machine although you like the apartment you feel that the asking price is too high since the apartment has been listed for over a month you begin to suspect that if you make a fair offer the seller might accept it even if it is below their asking price to that end you set about determining the apartment s fair market value by looking up examples of similar apartments in the same neighborhood that sold in the last year you assemble your findings in a table as follows looking at these results you begin to draw some general conclusions to start with you see that the apartments price per sf ranges between 140 and 275 with the higher prices belonging to those with more bedrooms and bathrooms better views in suite appliances and no need for renovations by contrast the apartment you are seeking to purchase is priced at 200 per sf and has fewer of these features than even the cheapest priced apartment in your table this seems to justify your intuition that the apartment is overpriced based on this information you decide to make an offer for 150 000 the seller accepts your offer 