Analyzing and Adjusting Comparable Sales Basic Real Estate Appraisal: Principle & Procedure – 9 th Edition © 2015 OnCourse Learning Chapter 9

Analyzing and Adjusting Comparable Sales

Basic Real Estate Appraisal: Principle & Procedure – 9th Edition

© 2015 OnCourse Learning

Chapter 9

STUDENT LEARNING OUTCOMES

•Name the Four Elements of Sales Comparison• List Three Rules for Making

Adjustments•Name the Three Types of Adjustments

Most Commonly Used• Explain How a Value Conclusion is

Reached 2

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9.1 BASIC METHODS OF COMPARING SALES

Qualitative vs. Quantitative Adjustments

Direct Comparison Method has Limitations – Relies on “Intuition”, but a good cross-check 3

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ELEMENTS OF COMPARISON METHOD

The Four Elements of Comparison• Terms and Conditions of Sale

•Date of Sale

• Location Elements

•Physical Elements

Detailed on the following slides 4

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1. TERMS OF SALE

• Seller Financing• More Favorable than Third-Party Lender terms?• Unfavorable?

•Assumed Financing• Favorable or Unfavorable?

• Seller-Paid Points or Closing Costs• Generally, Buyer pays Points• In a Buyer’s Market, Seller may pay Points

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1. CONDITIONS OF SALE (Con’t.)

• Property Rights Conveyed• Unusual Easements• Lease Terms – Favorable to Tenants?

•Motives of the Parties• Arm’s-Length• Adequate Market Exposure

• Personal Property/Tenant Improvements• Seller Concessions

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ELEMENTS OF COMPARISON (Con’t.)

2. Date of Sale• Market Conditions Influence Price• Time of Sale vs. Date of Value

3. Location Elements• Desirability• Do Prices Differ Due to Location?

4. Physical Elements• Size, Quality, Conditions, Age, etc.• Specific Features / Degree of Modernization

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COMPARING & ADJUSTING SALESComparison Process• Compare and Analyze the Four Elements of

Comparison• Are Feature Differences and Price Differences

Connected?

Adjustment Process• Are Market-Derived Adjustments Reasonable?• Should be Applied Consistently to Each Sale• Should Reduce Price Spread Between Sales

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RULES FOR MAKING ADJUSTMENTS

Adjust the Sale to the Subject!Make the Sale to be More Like the Subject

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RULES FOR ADJUSTMENTS (Con’t.)

Use Market-Derived Adjustments• Reflect the Market’s Reaction

Adjust in the Proper Sequence• From General to Specific• Terms & Conditions of Sale• Date of Sale• Location Elements• Physical Elements

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TYPES OF ADJUSTMENTS

• Lump-Sum Dollars• Percentage• Units of Comparison

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USING A SALES ADJUSTMENT GRID

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9.3 SELECTING AND USING UNITS OF COMPARISON

Detailed on the following slides 13

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TYPES OF UNITS OF COMPARISON

Total Property• Prices for Similar Properties•Minor Differences Accounted for by

Ranking the Sales

Physical Units• Price per Square Foot or Acre• Price per Room• Price per Dwelling Unit (See Example 9.3)

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UNITS OF COMPARISON TYPES (Con’t.)

Economic Units of Comparison• Price per Buildable Dwelling Unit• Price per Developable Building Area• Gross Income Multipliers

Applying Units of Comparison• Identify Why Unit Prices Differ• As Units (Size) Increases / Unit Price may Decrease

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GRAPHING THE SALES

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9.3 HOW TO ESTIMATE DOLLAR AND PERCENT ADJUSTMENTS

Direct Market Method•Matched Pair – At least Two Sales that can

be Compared to Estimate the Price Difference Caused by One Characteristic• Example 9.5 – Finding Adjustment for Size• Subject contains 2,600 SF Gross Living Area• Sale are Similar Except for GLA Size

See Next Slide 17

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EXAMPLE 9.5 - USING MATCHED PAIRS

Calculation For Size Adjustment

Adjustment: $10,000 ÷ 200 SF = $50 per SF

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Sale # Size (SF) Sale Price#2 2,700 $280,000#1 2,500 $270,000Difference 200 $10,000

DEPRECIATED COST METHOD

• Best Application is When Estimating an Adjustment for Physical Differences• Represents an Indirect Method, based in

part on Market Data• Example 9.7 - Finding a Garage Adjustment• Subject has a 440 SF Garage• Comparable Sale has No Garage• Problem – Finding Amount to Adjust the Sale

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DEPRECIATED COST METHOD (Con’t.)

Cost New: 440 SF @ $43.50 = $19,140Less: Depreciation Cost New $19,140 Age is 60 Yrs. Life Expectancy 100 Yrs. Depreciation: 60 ÷ 100 = X 0.60 Equals: Depreciation in $ - 11,484Equals: Adjustment Amount for Garage: $ 7,656

Rounded: $ 7,700 20

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ADJUSTING FOR SALE TERMS OR CONDITIONS

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STATISTICS - LINEAR REGRESSION

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STATISTICS – MULTIPLE REGRESSION• Can Analyze Multiple Variables, versus a

Single Variable (Linear Regression)• Requires a minimum of 20 to 30 sales

(properties)• Used by Assessors (Mass Appraisals) and

Lenders (Appraisal Reviews)• Now Used as a Valuation Tool and for

Supporting Adjustments by Appraisers• CompCruncher & Redstone are examples of

programs by Bradford Software 23

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STATISTICS – MULTIPLE REGRESSIONSample Results (Output)

Source: Redstone User’s Guide, v. 1.0.25 www.BradfordSoftware.com/Redstone

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AUTOMATED VALUATION MODELS• Computer Software Programs (AVM)• Many use a form of Multiple Regression• Analyzes Data in Specified Area or Neighborhood• Relates Results of Database Search to Subject

Property Information Imputed into the Model (e.g. Zillow.com)

•When Applied to an Individual Property it is Not an Appraisal (without an Appraiser)• An AVM May Become the Basis for an

Appraisal (if Output is judged Reliable) 25

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9.4 ARRIVING AT AN INDICATED VALUE

Four Steps to Arrive at a Conclusion1. Review the Entire Approach2. Review the Sales Data3. Estimate a Value Range4. Select a Final Value

(i.e. Reconciliation)

Detailed on the following slides26

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#1 – REVIEW THE ENTIRE APPROACH

•Comparability of Sales Selected•Activity Levels•Adjustment Accuracy• Statistical Limits• Lagging the Market•Motivation / Knowledgeable Parties

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#2 – REVIEW THE SALES DATA

• Sales Data• Consider Reliability of Information• Enough Information on Each Sale?• Look Back at Motivations – Particularly on one

Key and Important Sale

•Reviewing Adjustments• Consider Types of Adjustments / Reliability• Consider $ Amounts & Percentages (Net/Gross)

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#3 – ESTIMATE A VALUE RANGE

•May not be Necessary if Data are quite Comparable and Range is Tight• Using the Range of Adjusted Sales Prices• Consider Upper and Lower Limits of Range• Range of Value from Most Comparable Sales• Do Indicators by Most Comparable Sales Cluster

in High or Low End of the Range?

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#4 – SELECT A FINAL VALUE• Not a Mathematical Calculation – the Process

Requires Judgment!

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CHAPTER SUMMARY

Analyzing and adjusting comparable sales rely on two main methods: the Direct Comparison Method and the Elements of Comparison Method.

The Direct Comparison Method simply compares the overall desirability of each sold property with that of the subject, without any quantitative adjustments.

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CHAPTER SUMMARY (Con’t.)The Elements of Comparison Method compares the sales with reference to the details of four critical elements: the Terms and Conditions of Sale, the Time of Sale, the Location elements, and the Physical Elements of the properties.Arriving at a Value Conclusion requires a Review of the Entire Approach, a Review of the Sales Data, Estimating a Value Range, and the Selecting a Final Value. 32

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IMPORTANT TERMS & CONCEPTSAutomated Valuation Model (AVM) Matched Pair

Comparison Process Multiple Regression

Date of Sale Percentage Adjustment

Depreciated Cost Method Physical Elements

Direct Comparison Method Physical Unit of Comparison

Economic Unit of Comparison Sales Adjustment Grid

Elements of Comparison Method Sales Graph

Gross Income Multiplier (GIM) Terms and Conditions of Sale

Linear Regression Total Property Comparison

Location Elements Unit of Comparison

Lump-Sum Dollar Adjustment Value Range

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Documents

Analyzing and Adjusting Comparable Sales Basic Real Estate Appraisal: Principle & Procedure – 9 th Edition © 2015 OnCourse Learning Chapter 9