Sales Comparison Approach to Value PDF

9 Sales Comparison Approach to Value Learning Objectives After completing this lesson, students should be able to... Describe the characteristics of a real estate market and a comparable sale List the steps in the...

9 Sales Comparison Approach to Value Learning Objectives After completing this lesson, students should be able to... Describe the characteristics of a real estate market and a comparable sale List the steps in the sales comparison approach Differentiate between units of comparison and elements of comparison List the elements of comparison, such as conditions of sale and financing terms Understand how to analyze and adjust comparables Distinguish relative comparison analysis from paired data analysis Describe the sequence in which adjustments are made Explain the process of reconciling value indicators Suggested Lesson Plan 1. Give students Exercise 9.1 to review the previous chapter, “Cost Approach to Value.” 2. Provide a brief overview of Chapter 9, “Sales Comparison Approach to Value,” and review the learning objectives for the chapter. 3. Present lesson content: Real Estate Markets Comparable Sales © 2018 Rockwell Publishing Real Estate Appraisal Instructor Materials  Steps in Sales Comparison Approach – Collecting and verifying data – Selecting units of comparison – Analyzing and adjusting comparables – Reconciliation EXERCISE 9.2 Steps in the sales comparison approach Elements of Comparison – Real property rights conveyed – Financing terms – Conditions of sale – Expenditures needed after sale – Market conditions – Location – Physical characteristics – Factors affecting use – Non-realty items included in the sale EXERCISE 9.3 Elements of comparison Analyzing and Adjusting Comparables – Relative comparison analysis – Paired data analysis Adjustment Calculations – Percentage adjustments – Sequence of adjustments Reconciliation EXERCISE 9.4 Analyzing and adjusting comparables 4. End lesson with Chapter 9 Quiz. Chapter 9 Outline: Sales Comparison Approach to Value I. Real Estate Markets A. Real estate market: distinct group of buyers and sellers whose actions are influenced in similar ways by similar forces of supply and demand B. May be defined by physical boundaries, but most important factor is similarity in forces that affect value 2 Chapter 9: Sales Comparison Approach to Value  II. Comparable Sales A. To be comparable, a sale must compete with the subject property B. The sales comparison approach requires at least three recently sold comparables from the same market III. Steps in Sales Comparison Approach A. Collecting and verifying data 1. An appraiser must gather data on comparable properties in the market and evaluate how similar they are to the subject property 2. The appraiser must verify the data, including the circumstances of the transaction B. Selecting units of comparison 1. Unit may be an acre, a square foot, front foot, or the entire property C. Analyzing and adjusting comparables 1. An appraiser first identifies elements of comparison that may affect the value of the subject property 2. The appraiser then makes price adjustments to comparables based on differences D. Reconciliation 1. The appraiser estimates where in the range of values the subject property’s value lies 2. Not simple averaging of the indicators; weight is given to comparables that are more similar to the subject property EXERCISE 9.2 Steps in the sales comparison approach IV. Identify the Elements of Comparison A. Element of comparison: any aspect of a real estate transaction that may affect the sales price, such as terms and conditions B. Elements of comparison typically include the following items: 1. Real property rights conveyed: comparable should include same real property rights as subject property (for example, fee simple interest) 2. Financing terms: financing terms can affect price paid (seller-financed below- market interest rate may lead to higher price) a. Cash equivalent: financing terms do not affect price paid for property 3. Conditions of sale: the motivations of the buyer and seller in a transaction; should be normal market conditions a. Property offered in a competitive and open market b. Buyer and seller both acted prudently and knowledgeably c. There was no undue stimulus or unusual pressure on either party d. Arm’s length transaction (transaction between unrelated parties) e. Not an REO (bank-owned foreclosed property) 3 Real Estate Appraisal Instructor Materials  4. Expenditures needed after sale: comparables may be adjusted for upgrading or repairs needed after sale closes 5. Market conditions: adjustment may need to be made if market conditions changed between date of comparable sale and appraisal date 6. Location: comparable should be from same neighborhood as subject 7. Physical characteristics: adjustments may need to be made for factors like: a. size and shape of lot b. age and condition of improvements c. architectural style and compatibility d. type and quality of building materials e. square footage of living area f. number of rooms 8 Factors affecting use: comparables should have same highest and best use as subject property, and similar zoning, water rights, etc. 9. Non-realty items: appraisers must adjust if comparable sales price included items that weren’t part of real estate EXERCISE 9.3 Elements of comparison V. Analyze and Adjust Comparables A. Relative comparison analysis: based on qualitative measurement 1. Appraiser focuses on whether differences make comparable superior or inferior to subject property, without assigning numerical value to differences 2. Provides a range of possible values for subject property (“bracketing”), defined by the superior and inferior comparables B. Paired data analysis: based on quantitative measurement 1. Appraiser locates properties that are identical in all aspects except one 2. This enables appraiser to isolate the effect this one characteristic has on value and assign a value to the characteristic 3. If comparable is superior to the subject in some aspect, its price is adjusted down- ward 4. If comparable is inferior to the subject, its price is adjusted upward 5. Appraiser’s intent is to see what comparable would have sold for, if it were identical to the subject property 6. Adjustments are never made to subject property VI. Adjustment Calculations A. Percentage adjustments: adjustments may be expressed as percentages instead of dollar amounts 1. Appraiser should express percentage through this statement: “Property A is worth X% more (or less) than Property B” 4 Chapter 9: Sales Comparison Approach to Value  2. If subject property is first in the statement, the percentage applies to the value of the comparable B. Sequence of adjustments: sequence does not affect the outcome, unless one or more of the adjustments is a percentage 1. In percentage cases, adjustments should be made in this order: a) real property rights conveyed; b) financing terms; c) conditions of sale; d) market conditions; e) all other elements VII. Reconciliation A. An appraiser should not average the values indicated by the comparables; weight should be given to more reliable value indicators B. Comparables requiring fewer or smaller adjustments are usually more reliable than those requiring more adjustments C. Total amount of adjustment may be expressed as a dollar amount or as a percentage 1. Net adjustment: net sum of positive and negative adjustments 2. Gross adjustment: total dollar amount of all adjustments, regardless of whether they are positive or negative (usually the better measure of reliability) EXERCISE 9.4 Analyzing and adjusting comparables Exercises EXERCISE 9.1 Review exercise To review Chapter 8, “Cost Approach to Value,” read the following questions aloud to students and have them jot their answers down on a piece of paper; discuss answers together. 1. What is the formula for the cost approach to value? 2. What is the difference between reproduction cost and replacement cost? 3. What are the four methods of estimating construction cost? 4. What are the three types of depreciation? 5. What are the three methods of estimating depreciation? Answers: 1. Value = Cost of improvements – Depreciation + Land Value 2. Reproduction cost: cost of exact replica 5 Real Estate Appraisal Instructor Materials  Replacement cost: cost of building with same utility using current materials and techniques 3. Comparative unit method, unit-in-place method, quantity survey method, and cost index trending 4. Physical deterioration, functional obsolescence, and external obsolescence 5. Economic age-life method, market extraction method, and breakdown method EXERCISE 9.2 Steps in the sales comparison approach Discussion Questions: 1. What principle of value is at work in the sales comparison approach? 2. On the board, write the five steps in the sales comparison approach in an incorrect order, as in the example below, then ask the students what the correct order is. Selecting units of comparison Comparative analysis Verifying data Reconciliation Collecting data 3. A house has 2,000 square feet of living area, with 4 bedrooms and 2 bathrooms, on a 10,000-square-foot lot. Which of these would be a more useful comparable property? A house on the same block that’s 1,800 square feet, with 3 bedrooms and 2 bathrooms, on a 9,000-square-foot lot. A house in a neighborhood on the other side of town that’s 2,000 square feet, with 4 bedrooms and 2 bathrooms, on a 10,000-square-foot lot. Answers: 1. Principle of substitution 2. Correct order: Step 1 is collecting data. Step 2 is verifying data. Step 3 is selecting units of comparison. Step 4 is comparative analysis. Step 5 is reconciliation. Here’s the list in the incorrect order given in the question, with the correct step numbers added: Selecting units of comparison: Step 3 Comparative analysis: Step 4 Verifying data: Step 2 6 Chapter 9: Sales Comparison Approach to Value  Reconciliation: Step 5 Collecting data: Step 1 3. The one on the same block is better, since it competes with the subject property, even though it will require some adjustments for physical characteristics. EXERCISE 9.3 Elements of comparison Discussion Prompt: While looking for suitable comparable sales, an appraiser comes across the transactions described below. For each one, indicate which of the fol-lowing elements of comparison is at issue, and also whether the appraiser could use it as a comparable with an appropriate adjustment, or whether she should discard it. Location Physical characteristics Financing terms Market conditions (date of sale) Conditions of sale 1. The seller had to sell the house quickly in order to move cross-country to take a new job. 2. The seller financed the transaction for the buyer at a below-market interest rate. 3. The house sold eight months ago, and the market has been very slow. 4. The house is very similar to the subject property, but it’s in a different neighbor-hood, several miles away. 5. The comparable is on a 15,000-square-foot corner lot, while the subject property is on a 12,000-square-foot inside lot. 6. The buyer purchased the house from his brother-in-law. Answers: 1. Conditions of sale; should not be used as a comparable. 2. Financing terms; could be used with an appropriate adjustment. 3. Market conditions; could be used with an appropriate adjustment. 4. Location; could be used with an appropriate adjustment. 5. Physical characteristics; could be used with an appropriate adjustment. 6. Conditions of sale; should not be used. 7 Real Estate Appraisal Instructor Materials EXERCISE 9.4 Analyzing and adjusting comparables Discussion Prompt: In the current market, a fourth bedroom is considered to add $15,000 to a home’s value. A hot tub adds $5,000, and a finished basement adds $10,000. What adjustments should be made for each of the following dif- ferences? What is the net adjustment? What is the gross adjustment? The comparable has a fourth bedroom; the subject property has only three. The comparable doesn’t have a hot tub; the subject property does. The comparable doesn’t have a finished basement; the subject property does. Analysis: For the bedroom, subtract $15,000 from the comparable’s price. For the hot tub, add $5,000 to the comparable’s price. For the basement, add $10,000 to the comparable’s price. The net adjustment is $0. The gross adjustment is $30,000. 8 Chapter 9: Sales Comparison Approach to Value Chapter 9 Quiz 1. The sales comparison approach is reliable for 5. Cash equivalent financing: residential property because: A. indicates that the buyer was not typically A. an appraiser can usually find many good motivated comparables B. does not affect the price of the property B. the technique involved is easier C. means that an adjustment is necessary for C. it focuses on properties with very special- financing terms ized uses D. is not typical of financing terms available D. it covers a larger market in the market 2. Elements of comparison are: 6. A comparable property sold eight months A. aspects that are identical between the ago. Which element of comparison does the comparables and the subject property, to ap-praiser need to adjust the sales price for? eliminate any differences between them A. Market conditions B. units of measurement B. Location C. important property characteristics that are C. Highest and best use being compared between the subject D. Financing terms prop-erty and the comparables D. differences in value between the compa- 7. Most of the adjustments in a residential ap- rable properties praisal are based on differences in: A. physical characteristics 3. Which element of comparison includes whether B. real property interest conveyed a sale was an arm’s length transaction? C. financing terms A. Market conditions D. neighborhood B. Real property rights conveyed C. Non-realty items included in the sale 8. In a comparable sale, the floor needed refin- D. Conditions of sale ishing at the time of the sale. The appraiser’s adjustment for repairs needed after the sale 4. In one comparable transaction, the seller got should be based on the: a tax break because of the sale of the A. actual amount spent by the buyer to make property. The appraiser should: the repairs A. make an adjustment for conditions of sale B. expenses anticipated by the buyer and the B. reject the comparable because it is not an seller at the time of the transaction arm’s length transaction C. amount similar repairs would cost on the C. not make any adjustment because the effective date of the appraisal buyer was not aware of the tax break D. difference between the listing price and D. make an adjustment for financing terms the sale price 9. Paired data analysis is a: A. qualitative measurement technique B. ranking technique C. quantitative measurement technique D. reconciliation technique 9 Real Estate Appraisal Instructor Materials 10. The matched pairs of properties needed for 14. A comparable property has several adjust- paired data analysis must be: ments, including a $3,000 upward adjustment A. very similar or identical to the subject for market conditions, a $4,500 downward prop-erty for all elements of comparison adjustment for location, and a $2,500 upward except for one adjustment because the subject property has B. identical with respect to one element of an extra bathroom. The net adjustment for comparison this comparable is: C. very similar or identical to each other in A. +$10,000 all aspects except for one B. +$1,000 D. identical to the selected comparables for C. -$1,000 all elements of comparison except for one D. -$10,000 11. Adjustments are never made to the value of 15. A comparable property that has a small gross the subject property directly, partly because: adjustment: A. the subject property’s value is unknown, A. is less reliable than a property that has a so there is no starting point for making an large gross adjustment adjustment B. will have a large net adjustment B. relative comparison analysis and paired C. is more reliable as an indicator of the data analysis cannot be used together sub-ject property’s value C. paired data analysis does not provide nu- D. is less reliable than a property that has a merical values for different elements of small net adjustment comparison D. in paired data analysis, the appraiser will only determine a range of possible values 12. If the subject property has a feature that one of the comparable properties lacks, to account for the difference the appraiser should adjust the: A. value of the subject property downward B. value of the comparable downward C. values of the other comparables to match this one D. value of the comparable upward 13. Which of the following adjustments would usually be made first? A. 5% adjustment for conditions of sale B. 3% adjustment for neighborhood differ- ences C. $4,000 adjustment for size of garage D. $10,000 adjustment for number of bed- rooms 10 Chapter 9: Sales Comparison Approach to Value Answer Key 1. A. The sales comparison approach is 9. C. Paired data analysis is a technique emphasized in residential property ap- used to measure differences between praisals because the availability of good properties in quantitative terms. comparables makes it more reliable. 10. C. In paired data analysis, an appraiser 2. C. Elements of comparison are charac- uses matched pairs of properties that teristics that may affect the value of are very similar or identical to each property. The sales comparison ap- other in all ways except one. They do proach focuses on similarities and not have to be similar to the subject differences in elements of comparison property. between the subject property and the comparables. 11. A. Adjustments are always made to the value of the comparable properties. 3. D. One important consideration for condi- Adjustments cannot be made directly tions of sale is whether the sale was an to the value of the subject property, arm’s length transaction. since the subject property’s value is unknown, and the use of several com- 4. A. A comparable sale may need an adjust- parables could easily lead to mistakes ment for conditions of sale if one of like adjusting twice for the same factor. the parties received an unusual benefit 12. D. If the subject property has a feature from the transaction, such as a tax break. that the comparable lacks, the apprais- er adjusts the value of the comparable 5. B. Financing at typical market interest upward, to reflect what it would be rates that doesn’t affect the price of worth if it had the same features as the the property is called cash equivalent subject property. financing. 13. A. Adjustments that relate to differences 6. A. Adjustments for market conditions between the transactions are usually take into account changes over time in made before adjustments for differ- the forces that affect value. ences between the properties. 7. A. Almost all properties have some physi- 14. B. The net adjustment is the difference cal differences that would require an between the actual sales price of the adjustment. comparable and its adjusted value. In this case the net adjustment is $1,000 8. B. The buyer and seller determined the ($3,000 + $2,500 - $4,500). sales price based on the expenses they 15. C. Gross adjustment is usually a better anticipated at the time, so the appraiser should use this as the basis for the ad- indicator of reliability than net adjust- justment. ment. 11 Real Estate Appraisal Instructor Materials  PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Real Estate Appraisal Lesson 9: Sales Comparison Approach to Value © 2018 Rockwell Publishing Sales Comparison Approach to Value Sales comparison approach: Opinion of subject property’s value based on analysis of sales of comparable properties.  Comparable properties (comps): properties similar to subject property. Considered most reliable method for appraising single-family homes. © 2018 Rockwell Publishing Sales Comparison Approach to Value Market theory of value: Value determined by how buyers and sellers respond to supply and demand. Principle of substitution: Buyer won’t pay more for property than it would cost to acquire equally desirable substitute. © 2018 Rockwell Publishing 12  Chapter 9: Sales Comparison Approach to Value Real Estate Markets Real estate market: Distinct group of buyers and sellers whose actions are influenced in similar ways by similar forces of supply and demand.  Defined by physical boundaries or economic, social, or environmental factors. © 2018 Rockwell Publishing Real Estate Markets Finding comparable properties Comps used should be properties sold recently (last 6 months) in same market as subject property.  Sales comparison approach requires at least 3 comps from subject property’s market. © 2018 Rockwell Publishing Steps in Sales Comparison Approach Five basic steps:  collecting data  verifying data  selecting units of comparison  comparative analysis  reconciliation © 2018 Rockwell Publishing 13  Real Estate Appraisal Instructor Materials Steps in Sales Comparison Approach Collecting data First step: Gathering data about comparables.  Use comps most similar to subject property.  Collect same data for comps as for subject (terms and conditions of sale, property characteristics, etc.) © 2018 Rockwell Publishing Steps in Sales Comparison Approach Verifying data Second step: Verifying data to make sure it’s reliable.  To verify transaction data: interview parties.  To verify property characteristics: physically inspect. Third step: Selecting unit of comparison (total property, square foot, front foot, acre, etc.).  Use same unit of comparison for all properties. © 2018 Rockwell Publishing Steps in Sales Comparison Approach Comparative analysis Fourth step: Comparing elements of each comp to subject property and analyzing how similarities and differences affect value. Fifth step: Reconciling differences between different value indicators to reach final opinion of subject property’s value. © 2018 Rockwell Publishing 14  Chapter 9: Sales Comparison Approach to Value Summary Steps in Sales Comparison Approach – Real estate market – Comparable – Unit of comparison – Comparative analysis – Value indication © 2018 Rockwell Publishing Sales Comparison Approach Comparative analysis In comparative analysis, appraiser: 1. Identifies elements of comparison. 2. For each element, determines adjustment to account for differences between subject and each comparable. 3. For each comparable, finds total net adjustment and applies to comp’s sale price to get value indicator. © 2018 Rockwell Publishing Comparative Analysis Elements of comparison Elements of comparison : Key characteristics of property being compared to subject property. Most important for residential appraisals:  real property rights conveyed  financing terms  conditions of sale  expenditures needed after sale © 2018 Rockwell Publishing 15  Real Estate Appraisal Instructor Materials Elements of Comparison Elements of comparison (cont.):  market conditions  location  physical characteristics  factors affecting use  non-realty items included in sale © 2018 Rockwell Publishing Elements of Comparison Real property rights conveyed Property interest in comp sale must be same type of interest as one being appraised. Usually fee simple, but may also be leasehold or leased fee.  Leasehold interest: Right to use property under terms of a lease.  Leased fee: Interest of owner of leased property. © 2018 Rockwell Publishing Elements of Comparison Financing terms Cash equivalent: Transaction where price not affected by financing terms. If nonstandard financing used, must evaluate effect on transaction and make appropriate adjustment to comp’s sales price.  If effect on price is too great or too difficult to estimate, can’t use comp. © 2018 Rockwell Publishing 16  Chapter 9: Sales Comparison Approach to Value Elements of Comparison Conditions of sale Conditions of sale: Circumstances of transaction.  Normal conditions: a buyer and seller with motivations typical of other buyers and sellers in market.  If not normal conditions, sale may not be reliable indicator of market value.  Property should not be used as comp. © 2018 Rockwell Publishing Conditions of Sale Normal conditions Sale is generally considered to have taken place under normal conditions if: 1. arm’s length transaction (between unrelated parties) 2. no undue stimulus affecting either party 3. buyer and seller both acted prudently and knowledgeably 4. property was offered on open market for a reasonable period of time © 2018 Rockwell Publishing Conditions of Sale Normal conditions Even if comp sale did take place under normal conditions, may still need adjustments. REOs (“real estate owned”) are bank- owned foreclosed properties that should only use other REOs as comps. © 2018 Rockwell Publishing 17  Real Estate Appraisal Instructor Materials Elements of Comparison Expenditures anticipated If buyer of comp is expected to make post- sale repairs or upgrading, must adjust comp’s price.  Use expenses anticipated at time of transaction. © 2018 Rockwell Publishing Elements of Comparison Market conditions If market conditions have changed since comp’s date of sale, must consider effect on value.  More recent sale = more reliable indicator of value. Use most recent comps available (ideally, sold within past six months).  Usually don’t require adjustments for changing market conditions. © 2018 Rockwell Publishing Elements of Comparison Market conditions If market has been unusually inactive, appraiser may have to use sales older than six months.  Must make adjustments for inflation and other economic trends affecting prices since date of sale.  Must give reason for using older sale.  General rule: Don’t use comparable sales more than one year old. © 2018 Rockwell Publishing 18  Chapter 9: Sales Comparison Approach to Value Elements of Comparison Location Location typically has greater effect on property value than any other characteristic.  Look for comps in same neighborhood.  If absolutely necessary, may use comps from similar neighborhoods.  Even within same neighborhood, some areas may be less desirable than others. © 2018 Rockwell Publishing Elements of Comparison Physical characteristics Most adjustments in residential appraisal are based on physical differences:  size and shape of lot  age and condition of improvements  architectural style  type and quality of building materials  square footage of living area, basement, and garage © 2018 Rockwell Publishing Elements of Comparison Physical characteristics (cont’d)  number of rooms  functional utility  equipment and amenities  site improvements Ideal comparables share key physical characteristics of subject property, but usually have a few significant physical differences. © 2018 Rockwell Publishing 19  Real Estate Appraisal Instructor Materials Elements of Comparison Factors affecting use Highest and best use is critical to value.  Comp usually rejected if it has different highest and best use.  Comps with similar zoning restrictions, water rights, etc., generally have similar highest and best use. © 2018 Rockwell Publishing Elements of Comparison Non-realty items included If subject property is being sold with non- realty items, appraiser normally ignores those items.  But if comp sale included non-realty items, price must be adjusted. © 2018 Rockwell Publishing Summary Elements of Comparison – Real property interest conveyed – Financing terms – Conditions of sale – Anticipated expenditures – Market conditions – Location – Physical characteristics – Factors affecting use – Non-realty items included in sale © 2018 Rockwell Publishing 20  Chapter 9: Sales Comparison Approach to Value Sales Comparison Approach Analyzing comparable properties Next step in comparative analysis is analyzing comparables. Three basic steps: 1. For each element of comparison, measure differences between comp and subject property. © 2018 Rockwell Publishing Sales Comparison Approach Analyzing comparable properties 2. Analyze relationship between comps and subject property.  Consider how similarities/differences affect relative values of properties. 3. Use analysis to come up with indication of subject property’s market value, using comps’ sales prices as reference point. © 2018 Rockwell Publishing Analyzing Comparable Properties Measuring differences Differences between comp and subject property can be measured in qualitative or quantitative terms.  Qualitative measurement: Differences stated in terms of comparable being superior to, inferior to, or same as subject property.  Quantitative measurement: Differences stated in terms of dollar amounts or percentages. © 2018 Rockwell Publishing 21  Real Estate Appraisal Instructor Materials Measuring Differences Qualitative vs. quantitative measurement To analyze differences in qualitative terms:  use relative comparison analysis To analyze differences in quantitative terms:  use paired data analysis © 2018 Rockwell Publishing Measuring Differences Relative comparison analysis Relative comparison analysis: Consider relative quality of comps and subject property, focusing on whether differences make comp superior or inferior to subject.  Provides range of possible values (“bracketing”), with prices of superior comps defining upper end and prices of inferior comps defining lower end. © 2018 Rockwell Publishing Relative Comparison Analysis Ranking properties Comps can also be compared to each other.  Rank comps based on characteristic and analyze where subject property would fall in ranking.  Can help identify trends in value related to specific elements of comparison. © 2018 Rockwell Publishing 22  Chapter 9: Sales Comparison Approach to Value Measuring Differences Paired data analysis Paired data analysis: Uses data from matched pair of properties to assign value to element of comparison.  Appraiser finds properties that are identical (or very similar) to each other in all ways except one.  Any difference in value between properties can be attributed to that one characteristic. © 2018 Rockwell Publishing Paired Data Analysis Making adjustments After determining values of various elements of comparison, appraiser compares subject property to comps and determines where they differ.  Assigns value to each difference.  Makes appropriate adjustments to value. © 2018 Rockwell Publishing Making Adjustments Adjusting the comparable Adjustments always made to price of comp.  Increase or decrease comp’s price to make it better indicator of subject property’s value. Adjustments never made to value of subject property.  Value of subject property unknown, so no starting point from which to make adjustments. © 2018 Rockwell Publishing 23  Real Estate Appraisal Instructor Materials Making Adjustments Physical adjustments If subject property has feature that comp lacks: Comp’s Sales Price + Feature’s Value = Estimate of Comp’s Value with Feature If comp has feature that subject property lacks: Comp’s Sales Price – Feature’s Value = Estimate of Comp’s Value without Feature © 2018 Rockwell Publishing Making Adjustments Physical adjustments Appraiser makes series of adjustments for each significant difference, to estimate what comp would have sold for if it had been essentially identical to subject property. © 2018 Rockwell Publishing Comparing Analytical Techniques Relative comparison vs. paired data Paired data analysis may seem more accurate because it uses precise figures, but property should be evaluated as a whole.  Relative comparison analysis accounts for interrelated factors that affect value together.  Always consider both methods and choose most appropriate (can use both). © 2018 Rockwell Publishing 24  Chapter 9: Sales Comparison Approach to Value Summary Comparative Analysis – Measuring differences – Relative comparison analysis – Paired data analysis – Making adjustments © 2018 Rockwell Publishing Adjustment Calculations Manner in which adjustments are expressed and order in which they are applied are both important. Paired data analysis produces numerical value for particular feature, expressed as:  dollar amounts (simply added to or subtracted from comp’s sales price), or  percentages (more complicated). © 2018 Rockwell Publishing Adjustment Calculations Calculating percentage amounts When making percentage adjustments, write out statement of relationship between value of comp and value of subject property (using X as percentage amount): Property A is worth X% more (or less) than Property B. © 2018 Rockwell Publishing 25  Real Estate Appraisal Instructor Materials Adjustment Calculations Calculating percentage amounts If subject property is first (Property A is subject property), apply percentage to value of comp (Property B).  Multiply value of comp by percentage amount to get amount of adjustment.  Then add or subtract adjustment amount from comp’s value. © 2018 Rockwell Publishing Adjustment Calculations Calculating percentage amounts If statement has comparable first (comparable is Property A), apply percentage to value of subject property (Property B). Step 1: Add percentage to or subtract percentage from 1 (100%).  If comp is worth more than subject property, add percentage.  If comp is worth less, subtract percentage. © 2018 Rockwell Publishing Adjustment Calculations Calculating percentage amounts Step 2: Divide percentage by number from step 1. Step 3: Multiply value of comp by new percentage, to get amount of adjustment. Step 4: Adjust comp’s value by amount calculated in step 3.  Add amount to comp’s value if comp is worth less than subject property.  Subtract it if comp is worth more than subject property. © 2018 Rockwell Publishing 26  Chapter 9: Sales Comparison Approach to Value Adjustment Calculations Sequence of adjustments Sequence of adjustments for different elements will affect outcome, if one or more adjustments is a percentage.  Example: Comp needs two adjustments: 5% upward for changing market conditions, and $5,000 downward for extra bathroom. Price of comp is $250,000. © 2018 Rockwell Publishing Adjustment Calculations Sequence of adjustments If percentage adjustment made first:  5% of $250,000 is $12,500. Adjusted value is $257,500 (250,000 + 12,500 – 5,000). If made last:  $250,000 - $5,000 = $245,000. Since 5% of $245,000 is $12,250, adjusted value of comp would be $257,250 (250,000 – 5,000 + 12,250). Order of adjustments makes $250 difference in adjusted values. © 2018 Rockwell Publishing Adjustment Calculations Sequence of adjustments Adjustments for transaction usually made before adjustments for property features. Sequence for percentage cases: 1. property rights 2. financing terms 3. conditions of sale 4. market conditions © 2018 Rockwell Publishing 27  Real Estate Appraisal Instructor Materials Sales Comparison Approach Reconciliation Appraiser must reconcile values indicated by comps (may also need to reconcile values from paired data and relative comparison analyses). Reconciliation requires judgment and experience. (Can’t simply average value indicators.) Must consider relative reliability: comp that is more similar to subject should be more reliable indicator of value. © 2018 Rockwell Publishing Reliability of Comparables Extent of adjustment In paired data analysis, indicator of reliability is extent of adjustment required.  Net adjustment: Difference between actual value of comp and adjusted value.  Gross adjustment: Total amount of adjustments made to comp (either positive or negative). © 2018 Rockwell Publishing Extent of Adjustment Net vs. gross adjustment Gross adjustment is usually better measure of reliability than net adjustment. © 2018 Rockwell Publishing 28  Chapter 9: Sales Comparison Approach to Value Summary Adjustment Calculations/ Reconciliation – Percentage adjustments – Sequence of adjustments – Reconciliation – Gross adjustment – Net adjustment © 2018 Rockwell Publishing 29