Sales Comparison Approach
• The most important part of an appraisal is the
analysis of the market data available
• The market is telling you what people are
willing to pay for land in a given circumstance
• Improved and unimproved sales
• What you are looking for is a sale with a single
land class or something that you can use as
the basis for making the comparisons
Appraisal principles
• Supply and demand; remember that the
appraisal is made at a specific time and you
have to know the effective demand and the
supply of properties
• Substitution; REMEMBER the value of the
property is set by the price paid to acquire a
substitute property; changed by special
circumstances and the appraiser has to be
aware of these
Appraisal principles
• Externalities; neighborhood, services; roads,
access to markets, …
• Balance; appraiser has to constantly stay in
touch with what is happening not only in the
neighborhood but throughout the industry
Approach
• Obtain information on sales, listings and offers for
all properties similar to the subject
• Verify that information; too many tall tales with
respect to land; be aware!
• Get the right unit for comparison; dollars per
acre; per square foot; other
• Compare the subject property and the
comparable sales and adjust the price of
comparables as needed or eliminate them
• Reconcile the values from the comparables into a
single value or range of values
Elements of comparison
• Property rights conveyed; if there are leases and
other encumbrances on the property and the
desire is for a fee simple appraisal then
adjustments may be necessary to make the
subject and the sale the same; this adjustment
should be done first
• Financing; the terms of the sales can have an
impact on the price that is paid; appraisal should
be adjusted to cash or cash equivalency basis for
the appraisal
Financing adjustments
• Assume we have a 160 acre farm that sold for
$600,000 with a $120,000 down payment and
the seller financed the mortgage of $480,000
for 20 years at 5%. The market interest rate
was 8%. The 20% down and the 20 years are
within market parameters so only the low
interest rate needs to be considered.
• $480,000 mortgage at 5% for 20 years has a
payment of $38,516 per year.
• The present value of $38,516 for 20 years at
8% is $378, 156.
• $378,156 + $120,000 = $498,156 cash
equivalent price
• $600,000 - $498,156 = $101,844 or $637 per
acre adjustment
Financing adjustment
• Appraiser has to be careful in how they do this
and what values they assume.
• If a financing adjustment is made it should be
the second adjustment made
Condition of the sale adjustments
• This can be a sale under duress or a sale as
settlement of a divorce or something similar
where there is a need for the sale.
• Sale to a relative;
• Purchase because of some special reason
(sentimental)
• All these factors can influence the price paid
• It is best to not use such sales as a comparable
but if you have to then be careful; this should
be the third adjustment
Market condition adjustment
• This is the basic idea that times changes and
so do market conditions. Remember that the
appraisal is made as of a specific date
• If conditions have not changed then there is
no need for an adjustment, in other words
don’t change the comparable simply to
change it for time
• This should be the fourth change made
Location adjustment
• This can be a major difference depending on
the circumstances (3 most important things in
determining the value of a piece of property)
• Roads, markets (ethanol plant, river, rail lines,
etc. )
• Urban centers ( farming opportunities, highest
and best use)
Physical characteristics
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•
•
•
•
•
Land type ratios
Ranges
Land quality
Timber
Slope
Percent tillable
Types of adjustments
• Percentage
– 1) Subject equal to comparison; no adjustment
– 2) When presented as “subject is…” then use
multiplication
– 3) When presented as “the comparable is…” then
use division
• Subject is 10% superior to the comparable
– Multiply the price of the comparable by 1.1 to estimate
the value of the subject. % adjustment to the price of the
comparable is plus 10%
• Subject is 10% inferior to the comparable
– Multiply the price of the comparable by .9 to estimate the
value of the subject. % adjustment to the price of the
comparable is minus 10%
• Comparable is 10% superior to the subject
– Divide the comparable by 1.1 to estimate the value of the
subject. % adjustment to comparable is minus 9%
• Comparable is 10% inferior to the subject
– Divide the comparable by .9 to estimate the value of the
subject. % adjustment to comparable is 11%
Adjustments
• The key is to be consistent; don’t mix
comparable to subject, and vice versa
• Dollar adjustments; Most common; dollars
are added to or subtracted from comparable
to obtain the value of the subject
Paired analysis
• Provides market evidence for amount and
direction of a particular adjustment
• Pair only two sales for the adjustment and
check them against other sales
• Appraiser has to use some judgment “but
judgment without market evidence is simply
not acceptable appraisal practice.”
Impact of a paved road;
Sale A on paved and Sale B on dirt
Sale A
Sale B
$800
$750
160
160
•
Selling price
•
Acres
•
Financing
Cash
Cash
•
Market conditions
Current
Current
•
Size
0
0
•
Location
?
?
•
Land
0
0
•
Buildings
0
0
•
Adjusted price
$800
$750
Paired Comparison
• $50 per acre impact from the paved vs dirt
road
• Appraiser will keep checking this amount as
they find sales that let them make the
comparison
• Once one adjustment has been ‘proved’ in the
market it can be used for other comparisons
• Assume two similar sales except location and
size
Size Comparison
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•
•
•
•
•
•
•
•
Selling price
Acres
Financing
Market
Size
Location
Land
Buildings
Adjusted price
• Sale C
Sale D
$700
320
Cash
Current
?
-$50
0
0
$650
$750
160
Cash
Current
?
0
0
0
$750
Size comparison
• Adjustment is $100 per acre assuming that the
adjustment of $50 for location holds
• Next is time adjustment
• Remember with time adjustment that the
percentage adjustment is a reflection of
compounding too
• Sale two years ago at $1000, next year at
$1,100 and this year at $1,200 What’s the
percent change due to time?
Market conditions (time)
•
•
•
•
•
•
•
•
•
Selling Price
Acres
Financing
Market conditions
Size
Location
Land
Buildings
Adjusted Price
• Sale E
Sale F
$780
320
Cash
Current
$100
0
0
0
$880
$950
150
Cash
1.5 yrs.
0
0
0
0
$950
Market conditions (time)
• What is the percentage change due to time?
– $880 - $950 = -$70
• -$70/950 = -7.4%/1.5 = -4.9%
• Sale 1 yr. ago for $600,000
• Sale this yr. for $742,000 but property had
$65,500 in improvements
Comparison
• Sale A: 160 Ac. on Hyw. 6, two miles from
Growthville, all Class II soils, no
improvements, sold 1 year ago for $1,200,
Cash
• Sale A
•
•
•
•
•
•
•
Price
$1,200
Acres
160
Financing
Cash
Market
1 yr.
Location
2mi.
Land
0
Improvements 0
Sale B
Sale C
Sale D
$1,000
$860
$905
140
180
150
Subject
160
Cash
Loan Cash
Cash
Now
Now
1yr.
Now
4 mi
6 mi.
7 mi.
6 mi.
0
0
0
0
0
• 5% decrease in land values over past year
0
0
0
Steps
• First thing to do is to find a control sale. This
is the sale as similar to the subject property as
possible.
• Comparisons will be made to this sale
• Assume that we are interested in finding the
market contribution of location using these
sales.
• Time adjustments have to be made first
• Which is the most like the subject?
Pairs for Location
• Sale C
•
•
•
•
•
•
•
•
•
•
Selling Price
$860
Acres
180
Financing
Cash
Market conditions
Current
Size
0
Location
6 miles
Land
0
Buildings
0
Adjusted Price
$
Difference due to location
Sale A
$1,200
160
Cash
0
2 miles
0
0
$
Pairs for Location
• Sale C
•
•
•
•
•
•
•
•
•
•
Selling Price
$860
Acres
180
Financing
Cash
Market conditions
Current
Size
0
Location
6 miles
Land
0
Buildings
0
Adjusted Price
$
Difference due to location
Sale B
$1,000
140
Cash
Current
0
4 miles
0
0
$
Pairs for Location
• Sale C
•
•
•
•
•
•
•
•
•
•
Selling Price
$860
Acres
180
Financing
Cash
Market conditions
Current
Size
0
Location
6 miles
Land
0
Buildings
0
Adjusted Price
$
Difference due to location
Sale D
$905
150
Cash
0
7 miles
0
0
$
Improved land
• Appraisal of improved land starts with
determining the value for each land class
through evaluating sales of unimproved land
• These land classes will then be used to
determine the value of the land to the sale
and the residual will be the value of the
improvements
• The value of the improvements will then be
allocated among the buildings, etc.
Value of the land classes
• Assume that the appraiser knows that
unimproved sales indicate this division for
each land class
– Class I
– Class II
– Class III
100%
60%
40%
• What is the value of each land class if we had
a sale for $260,000 with 100 acres of Class I,
200 acres of Class II and 100 acres of Class III.
Land class example
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•
•
Class I 100%, Class II 60% and Class III 40%
100 ac. Class I, 200 ac. Class II, 100 ac. Class III
$260,000 sale price
100 * 100% = 100
200 * 60% = 120
100 * 40% = 40
260
$260,000/260 = $1,000 Class I
$1,000 * .60 =
600 Class II
$1,000 * .40 =
400 Class III