The Sales Comparison Approach

1
The Sales Comparison Approach

• Dr. Curtis F. Lard

2
Sales Comparison Approach (SCA)

• An appraisal procedure in which the market value
  established is based on prices paid in actual
  market transactions and current listings
• The process of analyzing sales of similar
  recently sold properties in order to derive an
  indication of the most probable sales price of
  the subject property being appraised

3
Economic Principles used by the Sales Comparison
Approach

• Competition
• Substitution
• Supply
• Demand
• Highest and Best Use

4
Steps in SCA to Valuation

• Define the ProblemEstablish PMV of Subject
  Property
• Select Comparable Market Sales
• Make Adjustments to S.P.
• Reconcile Value Estimates
• Estimate Final Value for S.P.

5
Type of Adjustments

• Lumps Sum (Location, Neighborhood, etc.)
• Linear Trends (Time)
• Variable Rates (Size)
• Percent Factor Grades (quality and condition)

6
Items Adjusted

• Location
• Time
• Size
• Quality

• Improvements
• Water
• Minerals
• Terms

7
Market Characteristics Why Adjustments are
Needed

• Heterogeneous product
• Few sales occur
• Sales are localized
• Lumpy product
• Large Amounts of cash
• Inexperienced buyers and sellers
• Lack of market information
• Location is VERY important

8
Market Assumptions

• Sellers will not take less than PMV of Similar
  Property
• Buyers will not pay more than PMV of Similar
  Property.

9
Rules of Thumb

• Always adjust to the SUBJECT PROPERTY!!!
• Any comp used should have a minimum effect of
  .1 on the estimate of PMV for the Subject
  Property
• No comp should have more than .5 weight on PMV
  of Subject Property
• These factors help determine weights
• of Adjustments
• Absolute adjustments

10
Ideal Comps

• Adjoins subject property
• Same Size
• Identical in improvements
• Same access and/or problems
• Sold yesterday

11
The Sales Comparison Approach Works Where

• You can identify market areas
• You let the market show differences

12
The Sales Comparison Approach Is Commonly Used
For

• Residences
• Lots
• Small businesses
• Rural lands

13
1. Lump Sum Example (Part 1)
Subject Property
14
1. Lump Sum Example (Part 2)
15
1. Lump Sum Example (Part 3)

• Estimated Value
• (.2)(57,000)
• (.3)(57,000)
• (.4)(55,000)
• (.1)(53,000)
• Subject Property 55,800

16
2. Linear Trends (Time)

• Sales of homes in B/CS increase in value by 6 in
  2003 and by 5 in 2004.
• PMV of Subject Property as of January 1, 2005
• Comparables

17
Adjustments

• Sale 1
• 130,000 ? 1.06 137,800
• 137,800 ? 1.05 144,690
• Sale 2
• 140,000 ? 1.05 147,000
• Sale 3
• No adjustment is made because of time
• PMV of SP .2(144,690) .3(147,000)
  .5(148,000)
• 28,938 44,100 74,000
• 147,000

18
Sources of Information

• Acquainted Persons/Community Members
• CEA, VoAg Teacher, SCS, ASCS, planners, zone
  officials, building inspectors
• Handlers of farm supplies
• Building contractors, farm equipment dealers,
  farm co-ops, elevator managers, milk plant, LS
  Mkg.
• Persons who sell land or make loans
• RE brokers or salesmen, FLB officers, INS, PCA,
  brokers
• Farm Managers, Appraisers, Ag. Consultant
• Other sources
• Water district, irrigation district, COFC, TREC,
  USDA publications, US Department of Labor,
  central appraisal districts

19
Problems with the Sales Comparison Approach

• Not enough data (common problem)
• Cost of gathering data
• Quality of data reported
• Some trends hold over very limited range
• Ranges are subjective
• Some relationships are not recognized (industry
  or courts)
• New relationships must stand up in court the
  cost of proving is expensive