Market Comparison
(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
Market Data
...
Comparable Sales
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.
Market Theory of Value
...
Principle of Substitution
...
-Real Estate Markets
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
-Comparable Sales
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 appr
Steps in the Sales Comparison Approach
The sales comparison approach involves 5-basic steps:
1. Collecting data
2. Verifying data
3. Selecting units of comparison
4. Comparative analysis
5. Reconciliation
Collecting and Verifying Data
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 u
Selecting Units of Comparison
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 fo
Analyzing and Adjusting the Comparables
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
Comparable Analysis
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.
Reconciling the Value Indicators
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 differen
Comparative Analysis
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
Identify the Elements of Comparison
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 characteristi
Real Property Rights Conveyed
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 type
Financing Terms
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.
I
Cash Equivalent
Financing on terms that are typical and commonly available in the market.
Conditions of Sale
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
REO
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.
Expenditures Needed After the Sale
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
Market Conditions
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
Location
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
Physical Characteristics
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 m
Contributory Value
The amount of value contributed by an improvement to a property's total value.
Use
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
Non-Realty Items Included in Sale
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-real
Other Elements of Comparison
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
-Analyze and Adjust the Comparables
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 com
Measuring Differences
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, apprai
Paired Data Analysis
(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 o
Relative Comparison Analysis
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 c
Bracketing
The process of determining a probable range of values.
Relative Comparison Analysis vs.Paired Data Analysis
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 app
Adjustment Calculations
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
Percentage Adjustments
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 t
Sequence of Adjustments
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 a
-Reconciliation
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 com
Net Adjustment
The net sum of positive and negative adjustment amounts for a comparable sale.
Gross Adjustment
The total of the amounts of adjustments to the sales price of a comparable, without regard to whether the adjustments are negative or positive.