Sales%20Comparison%20Approach

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Sales Comparison Approach

• Wayne Foss, MBA, MAI, CRE
• Foss Consulting Group
• Email wfoss_at_fossconsult.com

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Sales Comparison Approach

• Premise
• The market value of a property is directly
  related to sales prices of comparable competitive
  properties.

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Sales Comparison Approach

• Principles involved include
• Substitution
• Contribution
• Anticipation
• Supply and Demand

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Sales Comparison Approach

• The appraiser may include a variety of additional
  market information including
• Offers to purchase
• Options
• Listings
• Pending Sales
• Interviews of market participants

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Sales Comparison Approach

• Greatest emphasis is on actual closed sales
  because ..
• There was a completed transaction involving a
  meeting of the minds between buyer and seller
• Intent was completed demand backed-up by
  purchasing power
• But additional information should be considered
  also . . . . .

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Sales Comparison Approach

• Information about and recent subject sale,
  listing, offers, and options should be analyzed.
• Competitive listings and offers may indicate an
  upper-limit to the subject market value estimate.

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Sales Comparison Approach

• The Comparable Properties should have the same
  Highest and Best Use as the appraised property.
• Potential use
• Potential user
• Potential buyer
• Timing for use

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Sales Comparison Approach

• This approach has several advantages
• Considers value as present worth of future
  benefits automatically reflected in each market
  price.
• Simple, direct easy concept and technique for
  most readers to understand.
• Continued.

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Sales Comparison Approach

• Values as-if can be considered
• Best when appraiser has highly similar sales data
  and
• The comparisons are appropriately analyzed

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The Six Steps

• An Overview then the details
• 1. Know the Subject and the Appraisal Problem to
  be solved
• 2. Market Research find and confirm comparable
  sales of similar buyer appeal, use, potential.
• 3. Verify and confirm market information
• Buyer, Seller, broker someone with firsthand
  knowledge of the transaction

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The Six Steps

• 4. Select relevant Units-of-Comparison
• 5. Compare market observations to the appraised
  subject property
• 6. Reconcile the various value indications to a
  final value estimate by this approach

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The First Step

• 1. Know the Subject and the Appraisal Problem to
  be solved
• Understand the subject real estate and real
  property completely as well as highest and best
  use
• Understand the appraisal problem, definition of
  market value used, purpose and date of the
  appraisal

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The Second Step

• 2. Market Research find and confirm recent sales
  of comparable properties
• Similar and competing
• Same highest and best use
• Similar location, age, size, use, features
• Recent transaction, similar market conditions
• obtain sufficient information
• quantity, and quality
• virtually as much information as known about the
  subject itself!

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The Third Step

• 3. Verify and confirm market information
• Macro trends, level of activity, outlook
• Micro for each comparable sale or observation.
• Price, and financing terms (both are critical)
• date of sale / contract, and date of closing
• real estate and real property rights involved
• condition
• property characteristics
• anything impacting price and value (income,
  leases, rights transferred, use, restrictions,
  amenities, etc.)

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The Fourth Step

• 4. Select relevant Units-of-Comparison
• Price per sq. ft., sq. meter, hectare, cubic
  foot, cubic meter, etc. These relate to
• productivity
• market participant communication and standards
• Some are physical (/SF, /Room, /Unit)
• Some are economic (GIM, RO, RE)

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The Fifth Step

• 5. Compare market observations to the subject
• Normally use an adjustment grid or table
• Considering each point of significant difference
  between subject and comparable, adjust the sales
  price of each comparable property
• If the subject is SUPERIOR, adjust UP
• If the subject is INFERIOR, adjust DOWN

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The Fifth Step, cont...

• 5. Comparison adjustments continued...
• The key is to properly consider all points of
  significant difference between each comparable
  property and the subject, applying appropriate
  adjustment to comparables sale price.
• The result is an adjusted price indicated by each
  comparable then together they provide several
  value indications for the appraised property.

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The Sixth Step

• 6. Reconcile the various value indications to a
  final value estimate by this approach
• The conclusion is a result of applied judgement
• Which comparable sales or indications are most
  similar to the appraised property - and most
  recent.
• The conclusion is not a simple averaging of the
  adjusted sales prices
• The indications are a foundation for judgement in
  making the analysis and value conclusion.

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Steps in the Sales Comparison Approach

• 1. Know the Subject and the Appraisal Problem to
  be Solved
• 2. Market Research find comparable sales
• 3. Verify and confirm market information
• Macro trends, level of activity, outlook
• Micro for each comparable sale or observation
• 4. Select relevant Units-of Comparison
• 5. Compare market observations to subject
• 6. Reconcile the various value indications to a
  final value estimate by this approach

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Thoughts and Comments

• Essential to know all about the subject
  features, condition, uses, location, optimum use,
  alternative uses.
• Analysis of subject and market is
• Physical
• Social, Demographic
• Legal, Governmental
• Economic, Financial

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Thoughts and Comments, cont...

• Market research must be thorough
• Know macro market, trends, overall outlook
• Know micro market, about each sale used
• Confirm data personally to know motivations,
  condition of the property, financing, and all
  factors impacting price and value.
• Look at each comparable talk to buyer, seller,
  or agent
• Adjustments may be or , and may be to total
  price or unit-of-comparison.

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So thats the Sales Comparison Approach

• This approach is often the most significant if
  used correctly!

Are there any Questions?
Wayne Foss, MBA, MAI, CRE, Fullerton, CA
USA Phone [phone] Fax [phone]
Email wfoss_at_fossconsult.com