Real Estate Appraisal: Chapter 9 Sales Comparison Approach to Value

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Market Comparison
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(Market Data) In the sales comparison approach the appraiser analyzes data from actual market transactions involving properties similar to the subject property (referred to as comparable sales). First, the appraiser chooses appropriate transactions, then she identifies the differences that exist between the subject property and the comparable properties, and finally, she makes price adjustments to account for those differences. The adjusted sales prices of the comparable properties then serve as the basis for an opinion about the value of the subject property. The sales comparison approach is based on the market theory of value, which states that value is determined by the actions of buyers and sellers in the marketplace in response to the influences of supply and demand. Value is determined by the principle of substitution: a buyer will not pay more for a property than it would cost to acquire an equally desirable substitute, assuming the substitute property could be acquired within a reasonable length of time. In an active market where many equivalent properties are available, the value of any one property should be equivalent to the prices paid for similar properties.
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Market Data
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Comparable Sales
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A method of deriving a direct capitalization rate by analyzing the sales prices and incomes of comparable properties in the market. The income of a comparable property is divided by its sales price to indicate the capitalization rate.
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Market Theory of Value
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Principle of Substitution
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-Real Estate Markets
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The concept of a real estate market is central to the sales comparison approach. A real estate market is a distinct group of buyers and sellers whose actions are influenced in similar ways by similar forces of supply and demand. Prices paid for properties within a given market should indicate the value of other similar properties in that market, but usually don’t indicate the value of properties in a different market. Ex. Prices paid for home in a community with a strong economic base and high wage levels are likely to be much higher than prices paid for similar homes in a depressed community. In applying the sales comparison approach, the appraiser must be keenly aware of the subject property’s market. The geographic boundaries of a market may be large or small, depending on the type of property. Markets for residential property tend to be smaller, encompassing neighborhoods or districts, while markets for large commercial properties may be national or even international. Markets are sometimes defined by physical boundaries, but the critical factor in defining a market for appraisal purposes is similarity in the forces (economic, social, governmental, and physical/environmental) that influence value. If these forces are rapidly changing, it becomes much more difficult to identify comparable sales, and the sales comparison approach becomes much less reliable. Ex. In a period of rapid inflation, the pool of buyers who can afford to purchase a particular size of house may change almost daily, and sales of similar properties that closed a month ago may no longer be representative of the present market.
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-Comparable Sales
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For a sale to be considered comparable, it must compete with the subject property. It must be in the same market as the subject property and appeal to the same sorts of buyers. The sales comparison approach to value is the preferred approach for many appraisal purposes, including residential and vacant land appraisals. An appraiser can usually find a number of good comparables, and the values indicated by this approach are viewed as highly reliable in most cases. The strength of this approach–its reliance on market data–is also its weakness, however. If data for comparable sales are inadequate, or totally lacking, the sales comparison approach can’t be properly applied. This is often the case for special use properties such as public buildings, so the sales comparison approach is rarely used in appraising special use properties. To use the sales comparison approach, an appraiser must find at least three recently-sold comparables in the subject property’s market.
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Steps in the Sales Comparison Approach
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The sales comparison approach involves 5-basic steps: 1. Collecting data 2. Verifying data 3. Selecting units of comparison 4. Comparative analysis 5. Reconciliation
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Collecting and Verifying Data
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First, the appraiser must gather data on comparable properties in the market. In collecting the data, the appraiser needs to evaluate how similar these properties are to the subject property. The most similar comparable properties should be selected for use in the analysis. The appraiser should collect all of the same data for the comparables that she already has for the subject property. This includes the terms and conditions of all transaction, information about the properties’ physical characteristics, and information about listing prices and the prices of any pending offers, sales or options. In step two, the appraiser must verify the data that will be used. Not only does verification establish the reliability of the data, it also allows the appraiser to determine the circumstances surrounding the transaction. Ex. If the buyer or seller was not typically motivated, the transaction will not be a reliable value indicator. Interviewing a party to the transaction is considered the most reliable way to verify transaction data. Physical review is the most reliable way to verify the characteristics of the property.
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Selecting Units of Comparison
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When comparing different properties, it is important for the price of each property to be stated in the same unit of comparison. It would make no sense to compare one property’s price per square foot of living area to another property’s price per front foot of water frontage. The third step in the sales comparison approach is selecting units of comparison. That unit may be an acre, a front foot, or a square foot. Ex. The price of vacant land is often stated as a price per acre, per square foot, or per front foot. In residential appraisals, the price per square foot of living area and the price for the entire property are commonly used units of comparison. The appraiser must choose the unit or units of comparison that are most appropriate for the particular property being appraised. More than one unit may be appropriate, and the appraiser will make a comparison for each of the applicable units. If comparing several different units of comparison leads to a consistent indicator of value, that indicator of value will be more reliable. If a wide range of values results from using different units of comparison, the appraiser will want to investigate the cause of discrepancy. Ex. An analysis of comparable properties results in an indicated value for the subject property of $304,000, and an indicated value per square foot (derived separately) of $91.32. The size of the subject property is 2,000 square feet, so its indicated value based on value per square foot is $182,640 ($91.32 x 2,000). The values indicated by using different units of comparison are inconsistent, so the appraiser must investigate further to determine the reasons for the discrepancy, and make appropriate adjustments.
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Analyzing and Adjusting the Comparables
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The next step in the sales comparison approach is comparative analysis. The appraiser first identifies the elements of comparison that may affect the value of the subject property. For each element of comparison, the characteristics of the comparable are compared to those of the subject property; any differences are measured, and an appropriate price adjustment is made. The net total of all the adjustments for each comparable is then added to or subtracted from the price of the comparable to arrive at an indicator of value for the subject property.
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Comparable Analysis
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A method of deriving a direct capitalization rate by analyzing the sale prices and incomes of comparable properties in the market. The income of a comparable property is divided by its sales price to indicate the capitalization rate.
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Reconciling the Value Indicators
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The final step in the sales comparison approach is reconciliation of the value indicators provided by analysis of the comparables. The subject property’s value will fall somewhere between the highest and lowest value indicator. In reconciling the different amounts, the appraiser estimates where within the range of indicated values the subject property’s value lies. Reconciliation is not a simple averaging of the value indicators. The appraiser must evaluate the characteristics of each comparable and determine which is most reliable. Comparables that are most similar to the subject property are generally considered to be the most reliable indicators of the subject’s value.
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Comparative Analysis
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Comparative analysis involves several steps. Step 1: Identify the elements of comparison. Step 2. For each element of comparison, measure the differences between the subject and each comparable, and determine an appropriate adjustment to account for each difference. Step 3. For each comparable, find the net total adjustment and apply it to the comparable’s sales price to get a value indicator for the subject property.
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Identify the Elements of Comparison
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The first step in the comparative analysis is to identify the elements of comparison. An element of comparison is any aspect of a real estate transaction that may affect the sales price, including the terms and conditions of the sale and the characteristics of the property itself. Don’t confuse elements of comparison with units of comparison. A unit of comparison is simply a unit of measurement; an element of comparison is one of the key considerations that contributes to differences in the prices paid for properties. Ex. An appraiser knows that the number of baths in a house has an effect on its sales price, so the number of baths is identified as an element of comparison for the appraisal. If the subject property has two baths, but the comparable property has only one, the appraiser will adjust the sales price of the comparable property to account for the difference in this element of comparison. The elements of comparison for a typical residential appraisal include: 1. Real property rights conveyed (fee simple or other interest) 2. Financing terms 3. Conditions of sale (the motivation of the buyer and the seller) 4. Expenditures needed after the sale 5. Market conditions (date of sale) 6. Location 7. Physical characteristics (size, quality, etc.) 8. Factors affecting use (zoning, water rights, etc.) 9. Non-realty items included in the sale Note that the first five items on this list concern the transaction, while the remaining four are property-related.
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Real Property Rights Conveyed
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In most residential transactions, the real property rights conveyed include the full fee simple interest in the property. Similarly, in most appraisals the property interest that is being appraised is the fee simple. Some appraisals may involve other types of real property rights. Two common examples of non-fee simple interests are the leasehold and the leased fee. A leasehold interest includes the right to use property under the terms of a lease. The interest of the owner of the leased property is called the leased fee. Appraisals of leasehold estates usually involve long-term ground leases, where the tenant has constructed a building on the leased land. In such cases, the building belongs to the tenant (the owner of the leasehold estate), while the land belongs to the owner of the leased fee estate. When choosing comparable properties, it’s important to make sure that the real property interest involved in a comparable transaction was the same type of interest that’s being appraised. If the interest being appraised is a fee simple interest in the subject property, the appraiser should not use a transaction involving a leasehold interest as a comparable.
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Financing Terms
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The financing used to purchase a property can affect the price paid for it. If a seller financed the sale of his house at a below-market interest rate, the price paid may have been higher than the buyer would have agreed to without the seller financing. If the financing terms don’t affect the price paid for the property, the financing is referred to as cash equivalent. Sales that are cash equivalent don’t require any price adjustment for financing terms. If nonstandard financing (Financing terms that are not typical of those available in the market) was used, the appraiser must evaluate the impact of the financing on the transaction. Nonstandard financing can take a wide variety of forms, from seller financing to interest rate buydowns to loan assumptions. In some cases, the monetary effect may be fairly obvious. If the seller pays some or all of the points on the buyer’s loan, the effect on the sales price is likely to equal the amount paid by the seller. Other cases are not so clear-cut. In a sale that involves seller financing the buyer may benefit in any of several ways. A below-market interest rate, a low downpayment, reduced (or zero) loan fees, and easier loan qualification are some of the possible benefits of seller financing. The appraiser may be able to make an appropriate adjustment to the comparable’s sales price, but if the impact on the price was too great or is too difficult to estimate, another comparable should be chosen.
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Cash Equivalent
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Financing on terms that are typical and commonly available in the market.
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Conditions of Sale
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Conditions of sale are the circumstances under which a real estate transaction took place. Normal conditions of sale include a buyer and a seller who are typically motivated–whose motivations in entering into their transaction are essentially the same as those of most other buyers and sellers in the real estate market. A sale can generally be considered to have taken place under normal conditions if: 1. it was an arm’s length transaction (between unrelated parties) 2. neither party was subject to undue stimulus (unusual pressure to act) 3. both parties acted prudently and knowledgeably, and in their own best interest 4. the property was exposed on the open market for a reasonable length of time If one or more of these conditions were absent, the parties weren’t typically motivated. The price paid for the property isn’t necessarily a reliable indication of its market value. A seller who has been transferred to another city may accept a low offer to make a quick sale, or a developer may pay an above-market price for a property that is necessary to complete a certain project. If the buyer was a relative, friend, or business associate, the seller may have accepted a lower price than she would have been willing to accept from a stranger in an arm’s length transaction. Ex. The appraiser finds a comparable that is very similar to the subject property and located only two blocks away. The comparable sold for $620,000 three months ago. Because the buyer was the seller’s nephew, it wasn’t an arm’s length transaction, and the appraiser must assume that the motivation of the parties was not typical. The price paid may be significantly less than the property’s true market value.. The appraiser must investigate the circumstances surrounding each comparable sale to make sure it took place under normal conditions. If it didn’t, that usually means it shouldn’t be used as a comparable. Because the buyer and the seller were acting under the influence of forces that don’t affect the market in general, the price paid is not a reliable indicator of market value. It’s typically very difficult to quantify exactly how much those unusual forces affected the price. Occasionally a sale that didn’t take place under normal conditions can be used as a comparable if the appraiser makes an appropriate adjustment to the price. Adjustments for conditions of sale are rare and should be made with great care; the appraiser must conduct careful research to find data that support the adjustment. If sufficient supporting data are not available, the appraiser should not use the transaction as a comparable sale. When appraising a property that is owned by a financial institution because of a mortgage default (referred to as an REO, for “real estate owned”), the appraiser should use only other REOs as comparables. REOs are usually vacant, which means that there’s an increased risk of vandalism and other physical deterioration. Further, there are often delays in the closing process, caused by institutional bureaucracy. Lengthy delays can jeopardize the buyer’s financing and will certainly mean a later possession date. If an appraiser who is evaluating an REO is forced to use a non-REO as a comparable, she will usually have to make a downward price adjustment to the comparable property.
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REO
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A sale of property owned by a bank or other financial institution, often as a result of mortgage foreclosure. REO stands for “real estate owned.”
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Expenditures Needed After the Sale
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A property’s sales price will be affected by any needed upgrading or repairs that won’t be carried out before the sale closes. The buyer recognizes that she’ll have to pay for the repairs soon after closing, and she’ll take those anticipated expenditures into account in account in negotiations with the seller. If the buyer of a comparable property expected to make repairs after the sale, the appraiser should adjust the price of the comparable to reflect this. The appraiser bases the adjustment on the amount of expenses anticipated at the time of the transaction, since the buyer and the seller agreed on the sales price based on what they anticipated. Even if the actual expenses turned out to be higher or lower, the anticipated expenses determine the appraiser’s adjustment.
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Market Conditions
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The price paid for a comparable property reflects the state of the market as of the date the property was sold, but the forces that affect value are subject to constant change. If market conditions have changed between the date of the comparable sale and the effective date of the appraisal, an adjustment must be made to account for this fact. The closer a comparable sale is to the effective date of the appraisal, the more reliable it will be as a value indicator. Comparables that sold within 6-months of the appraisal date don’t necessarily require any adjustment for market conditions, unless significant change has occurred in the market since the date of the comparable sale. If the real estate market has been unusually inactive, the appraiser may have to use sales older than 6-months as comparables. In this case, adjustments must be made for inflation or other economic trends that have affected market price since the date of sale. Ex. The appraiser is unable to locate three comparable properties that have sold in the past 6-months, so he chooses a comparable that sold 10-months ago. Since then, property values have increased about 3% due to inflation. To account for the effect of inflation, the appraiser adds 3% to the comparable’s sales price. Comparables older than one year are usually not considered, even in the absence of any obvious change in market conditions. Ex. Suppose an appraisal has an effective date of December 1. If the appraiser locates a comparable that sold back in July, he could use that comparable without adjustment, unless the market was unusually volatile between July and December. If he locates a comparable that sold in April, he would need to adjust the comparable’s price to account for any inflation since then. If he locates a comparable that sold in November of the previous year, he would not be able to use that comparable at all.
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Location
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Another important element of comparison is the location of the comparable in comparison to the location of the subject property. Ideally, the comparable should be in the same neighborhood as the subject. If sufficient recent comparables are not available from the subject neighborhood, the appraiser will consider sales from nearby similar neighborhoods. Using comparables from other neighborhoods requires the appraiser to compare the neighborhoods, as well as the individual properties. This complication should be avoided whenever possible. Even if the comparable is located in the same neighborhood as the subject, the appraiser must consider any differences in value that result from location. Ex. Two identical properties located a block apart in the same neighborhood may have different values if one has a pleasant view, while the other doesn’t. The values could also differ due to location if one is on a busy arterial, while the other is on a quiet side street. Adjustment for locational differences normally represent differences in site value, but they may also represent differences in external obsolescence of the improvements. In the latter case, the appraiser must be careful not to make duplicate adjustments (under location and under physical characteristics) for the same item.
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Physical Characteristics
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Most adjustments in residential appraisals are made for differences in the physical characteristics of the site or the improvements. Comparables with differences in property rights, financing terms, conditions of sale, market conditions, or location are more likely to simply be rejected from consideration. A wide range of physical characteristics can affect the price paid for a property. The appraiser must consider all of these potential differences, and make the appropriate adjustment for each characteristic where the subject differs from the comparable. Physical characteristics that are elements of comparison in residential appraisals include: 1. Size and shape of lot 2. Age and condition of improvements 3. Architectural style and compatibility 4. Type and quality of building materials 5. Square footage of living area/basement/garage 6. Number of rooms 7. Functional utility 8. Equipment and amenities 9. Site improvements Adjustments should always be based on an item’s contributory value, not on its cost. According to the principle of contribution, the value of an individual component or improvement is equal to the amount of value it adds to the property as a whole. This amount, referred to as the item’s contributory value, depends on market forces and is independent of the item’s cost. So a second bathroom that cost $8,000 to install may add $11,000 to the home’s value. Conversely, a third bathroom that also cost $8,000 to install may increase the home’s value by only $5,000.
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Contributory Value
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The amount of value contributed by an improvement to a property’s total value.
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Use
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Highest and best use is central to value, comparables are usually rejected if their highest and best use doesn’t match that of the subject property. For residential appraisals, choosing comparables with zoning restrictions similar to the subject property usually ensures that they have the same highest and best value. Other factors affecting use, such as water rights of a flood zone designation, may also be elements of comparison.
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Non-Realty Items Included in Sale
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An appraised value is usually the value of the subject real property only; it doesn’t include the value of any personal property (such as furniture) that may be sold in conjunction with the real estate. If the sales price of a comparable includes non-realty item, the appraiser must adjust the price of the comparable to account for the value of the personal property items included in the sale.
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Other Elements of Comparison
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The elements of comparison discussed above are the most common ones in residential appraisals. Many other elements could conceivably influence the price paid for a particular property. The appraiser must be alert to any characteristics of the subject or a comparable that could influence value, and make whatever adjustments are necessary.
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-Analyze and Adjust the Comparables
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After identifying the appropriate elements of comparison, the next step in comparative analysis is to analyze the comparable. To do this, the appraiser first measures the differences between each comparable and the subject property for each element of comparison. Next, the appraiser considers how the similarities and differences affect the relative values of the properties, and adjust the sales prices of the comparables to reflect the differences. The appraiser then uses this information to arrive at a indicator of the subject property’s market value, with the sales of the comparables as a reference point.
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Measuring Differences
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The differences between a comparable and the subject property can be measured in two ways: 1. qualitative (superior, inferior, or same) 2. quantitative (dollar amount or percentage) To analyze a difference in value based on qualitative measurement, appraisers use a technique called relative comparison analysis. For analyzing differences in quantitative terms, they use a technique called paired data analysis.
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Paired Data Analysis
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(Matched Pairs Analysis) (Paired Data Set Analysis) A technique for measuring the effect on value that is caused by differences in a single element of comparison. The effect on value is estimated by comparing the prices of properties that differ in only one element of comparison. Also called matched pairs analysis. In paired data analysis (also known as matched pairs analysis, or paired data set analysis), an appraiser uses data from a matched pair of properties to assign a value to an element of comparison. The appraiser first locates properties that are identical (or very similar) to each other in all aspects except one. Note that these are not the properties the appraiser has selected as comparables; they don’t need to be similar to the subject property, just similar to each other. By selecting two properties with only one significant difference, the appraiser isolates the effect this one characteristic has on value. This allows the appraiser to assign a value to the characteristic when it’s used as an element of comparison. So when a comparable differs from the subject property as to this characteristic, the appraiser can use the value of the characteristic to adjust the price of the comparable property. Paired data analysis is best illustrated by a market data grid listing several elements of comparison for five different properties. 1. Identify pairs of properties that vary in only one characteristic. Ex. Properties #1 & #4 are identical except for how big the garage is. Since the price paid for property #4 is $6,000 higher than the price of property #1, an appraiser would conclude that the market value of the extra garage space was $6,000. Ex. Properties #2 & #5 are identical except for 100 sq.ft more in #2. Since the price paid for property #2 is $8,000 higher than the price of property #5, an appraiser would conclude that the market value places $80 per square foot on the additional living space. The appraiser in this example has now identified adjustment values for four elements of comparison: 1. Garage size 2. Living area 3. Lot size 4. Basement These values can hen be used to make adjustments to the sales prices of comparables to account for differences between the subject property and the comparables. Although the concept behind paired data analysis is fairly simple, the real world is more complex. Rarely will an appraiser be able to identify two properties that are identical in all characteristics except one. It’s often necessary necessary to make price adjustments for other differences first, in order to isolate the effect of the particular difference the appraiser is trying to measure. Another issue that comes into play when using paired data analysis is the effect of one characteristic on value can often depend on another characteristic. The amount of the adjustment to account for the difference in the size of the improvements may well depend on the age of the improvements: 100 sq. ft. of living space may add more value (in terms of dollar amount) to a 10-year-old home than it does to an 18-year-old home. Appraisers must analyze and compare hundreds of sales transactions to gain an understanding of the effects on value caused by different elements of comparison. Paired data analysis is a useful tool in this process, but more sophisticated statistical analysis is often necessary as well. For each measured difference in an element of comparison, the appraiser must make adjustment to account for the resulting difference in value. Adjustment are made to the prices of the comparables. If a comparable is superior to the subject in some respect, its price is adjusted downward. If the comparable is inferior to the subject, its price is adjusted upward. The appraiser makes a series of these adjustments for each significant difference between the subject property and the comparable. In this way, she arrives at an estimate of what the comparable would have sold for if it has been identical to the subject property. Adjustments are never made directly to the value of the subject property. This is because the subject property’s value is unknown, so there is no starting point from which to make adjustments. Because the appraiser is comparing several properties against the subject property, it would be easy to make mistakes such as adjusting twice for the same factor. Most of an appraiser’s adjustments are made to account for differences in physical characteristics between the comparables and the subject property. Although the appraiser uses comparables that are as similar to the subject property as possible, at least some physical differences will usually exist.
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Relative Comparison Analysis
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A technique for estimating whether a difference in a single element of comparison has a positive, negative, or neutral impact on value. Similar to paired data analysis. In relative comparison analysis, the appraiser considers the relative quality of the comparables and the subject property, without assigning a numerical value to the differences make a comparable superior to the subject property. Based on the prices of the comparables, the appraiser can develop an opinion of the subject property’s value. The subject property should be worth less than comparables that are superior, and it should be worth more than comparables that are inferior. Relative comparison analysis provides a range of possible values for the subject property. The prices of the superior comparables define the upper end of the range, and the price of the inferior comparables define the lower end. The appraiser can be reasonably confident that the subject property’s value falls within the range, without deciding on a precise value figure. The process of determining a probable range of values is know as bracketing. The adjusted sales prices of comparables that require mostly downward adjustment and the comparables that require mostly upward adjustment are “brackets” that mark each end of the range of likely values for the subject property. If the comparables chosen are all superior or all inferior, only the upper or lower limit of the range can be identified. To narrow down the range of values for the subject property, the appraiser may need to look for additional comparables. In addition to measuring the comparables against the subject property, the comparables can also be compared to each other. The appraiser can rank the comparables based on a particular characteristic and analyze where the subject property would fall in this ranking. The can help the appraiser identify trends in value related to specific elements elements of comparison. Ex. An appraiser might rank comparables according to square footage to see where the subject property fits in. The ranking and prices of the comparables help the appraiser understand how the subject property’s square footage affect its value.
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Bracketing
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The process of determining a probable range of values.
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Relative Comparison Analysis vs.Paired Data Analysis
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At first glance, paired data analysis may appear more accurate than relative comparison analysis because it produces a precise figure instead of a range of values. The precision of paired data analysis can also be misleading, because the purpose of an appraisal is to evaluate the property as a whole, not just as sum of different characteristics. Relative comparison analysis allows the appraiser to account for interrelated factors that affect value together. An appraiser should always consider both methods and choose the one that is most appropriate for the situation. Depending on the available data, sometimes it is appropriate to use relative comparison analysis and paired data analysis together. Ex. The appraiser may have paired data to support adjustments related to some elements of comparison but not others. If paired data is not available for a particular feature, the appraiser will need to use relative comparison analysis for that element of comparison instead. When an appraisal involves both relative comparison analysis and paired data analysis, they must be used consistently. For any specific element of comparison, the appraiser should apply the same method of analysis to all of the comparables.
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Adjustment Calculations
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An appraiser should carefully consider the form in which adjustments to the prices of comparables are expressed, and the order in which they are applied. Although adjustments are usually expressed in terms of a dollar amount, they may also be expressed as percentages. When an adjustment is expressed as a percentage, the percentage must be converted into dollars in order to calculate the adjusted sales price.
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Percentage Adjustments
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In converting a percentage to a dollar figure, great care must be taken to understand exactly what the percentage is referring to. Saying that Property A is worth 10% more than Property B is not the same thing as saying that Property B is worth 10% less than Property A. In the first case, the 10% is referring t the value of Property B: Property A is worth 110% (100% + 10%) of the value of Property B. In the second case, the 10% is referring to the value of Property A: Property B is worth 90% (100% – 10%) of the value of Property A. If Property A is worth $100,000, the value of Property B in the first case would be $100,000 Ă· 1.1 = $90,909. In the second case, Property B’s value would be $100,000 x 0.9 = $90,000. To determine whether a percentage applies to the value of the subject property or the value of the comparable, simply state the relationship between the values of the two properties. The statement should be in this form, with X representing the percentage amount: “Property A is worth X% more (or less) than Property B.” If your statement of the relationship has the subject property first (Property A is the subject property), the percentage applies to the value of the comparable (Property B). The adjustment calculation is simple, since it is always the comparable’s value (not the subject’s value) this is adjusted: 1. Multiply the value of the comparable by the percentage amount to get the amount of the adjustment. 2. Then add or subtract this amount from the comparable’s value, depending on the relationship between the two properties. If the statement of the relationship says the subject property is worth more than the comparable (the comparable is Property A), then the percentage applies to the value of the subject (Property B). If the percentage applies to the value of the subject, the calculation is more difficult, since the value of the subject is not known. A 4-step process is required.: 1. If the comparable is worth more than the subject, add the percentage to 1 (100%); if the comparable is worth less than the subject, subtract the percentage from 1(100%). 2. Divide the percentage by the number calculated in Step 1. 3. Multiply the value of the comparable by the number calculated in Step 2 to get the amount of the adjustment. 4. Adjust the comparable’s value by the adjustment amount calculated in Step 3. Add the amount to the comparable’s value if the comparable is worth less than the subject property. Subtract it if the comparable is worth more than the subject property. Ex. You’ve located a comparable that is nearly identical to the subject property. The comparable sold for $300,000 two weeks ago, but it’s located in a different neighborhood. The comparable’s neighborhood is considered a better location and its homes are generally worth about 10% more than properties in the subject property’s neighborhood. First write out the statement of the relationship between the subject property and the comparable: “The comparable is worth 10% more than the subject property.” The subject property is Property B, so the percentage applies to the subject property’s value. Step 1. Add the percentage (10% or 0.1) to 1. 0.1 + 1=1.1. Step 2. Divide the percentage by the result of Step 1. 0.1 Ă· 1.1 =0.091 or 9.1% (rounded). Step 3. Multiply the value of the comparable by the percentage from Step 2 to find the amount of the adjustment. $300,000 x 9.1% = $27,300. Step 4. Since the comparable is worth more than the subject property, adjust the comparable’s value downward by the adjustment amount from Step 3. $300,000 – $27,300 = $272,700. This is the adjusted value of the comparable.
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Sequence of Adjustments
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When making adjustments for a number of different elements of comparison, the sequence in which the adjustments are made doesn’t affect the outcome of the calculations, unless one or more of the adjustments is a percentage. Ex. A comparable requires two adjustments: a 5% upward adjustment for changing market conditions, and a $10,000 downward adjustment because the comparable has an extra bathroom. The price of the comparable is $500,000. If the appraiser makes the 5% adjustment first, then the first calculation is 5% of $500,000 = $25,000. The two adjustment amount are then applied to the comparable’s price to get an adjusted value of $515,000 ($500,000 + $25,000 – $10,000). If the appraiser made the $10,000 adjustment first, the first calculation would be: $500,000 – $10,000 = $490,000. Then the percentage adjustment would be: 5% of $490,000 = $24,500. That would mean that the adjusted value of the comparable is %514,500 ($500,000 – $10,000 + $24,500). Thus, in this situation, the order in which the adjustments are applied makes a $500 difference in the adjusted value. There are no hard and fast rules for the sequence of adjustments in a sales comparison analysis. It’s up to the appraiser to determine the most appropriate sequence based on the appraiser’s analysis of the market. In percentage cases the adjustment should be made in the following sequence: 1. Real property rights conveyed 2. Financing terms 3. Conditions of sale 4. Market conditions These adjustments should be made first, and then adjustments concerning the comparable property (location, physical characteristics, etc.). Ex. One comparable has unusual financing terms that require the appraiser to make a percentage adjustment. The comparable’s price needs to be adjusted based on physical differences in the property: the comparable has a fireplace and the subject property doesn’t. In this situation, the appraiser would make the adjustment for the financing first, before adjusting the value of the comparable to account for the fireplace.
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-Reconciliation
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The final step in the sales comparison approach to value is reconciliation, in which the appraiser reviews all of the data and analysis and forms an opinion about the subject property’s value. The appraiser will always analyze at least three different comparable properties, with each analysis providing a value indicator for the subject property. Even if the appraiser has chosen good comparables, it is unlikely that they will all indicate exactly the same value for the subject property. The adjusted sales price typically present a range of values, and the appraiser must use her judgement and experience to select some value within this range. The appraiser may need to reconcile values based on paired data analysis with conclusions drawn from relative comparison analysis. Choosing an appropriate value for the subject property is not a mechanical process. An appraiser should never average the values indicated by the comparables to estimate the subject property’s value. Instead, in reconciling the values, the appraiser considers their relative reliability and gives more weight to the more reliable value indicators. According to the principle of substitution, a comparable that is more similar to the subject property should be a more reliable indicator of value. This is because a more similar comparable competes more directly with the subject property than less similar comparables. Other factors that may affect a value indicator’s reliability might include a neighborhood’s stability or a market’s size: a changing neighborhood indicates unstable values, while an extremely small market can translate into less reliable indicators. In paired data analysis, a good indicator of reliability is the extent of adjustment that is required for each comparable. Comparables requiring less adjustment are generally more reliable than those that require larger adjustments. These comparables will therefore e given more weight when the figures are reconciled. Ex. The adjusted sales prices of four comparable properties indicate the following range of values for the subject property. 1. $302,300 2. $297,700 3. $305,100 4. $303,700 Comparable #1 is the most similar to the subject property and requires the fewest adjustment. The appraiser gives the most weight to this comparable, concluding that the indicated value of the subject is $302,000.
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Net Adjustment
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The net sum of positive and negative adjustment amounts for a comparable sale.
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Gross Adjustment
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The total of the amounts of adjustments to the sales price of a comparable, without regard to whether the adjustments are negative or positive.

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