Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 9
CHAPTER 9
ANALYZING AND ADJUSTING COMPARABLE SALES
STUDENT LEARNING OUTCOMES
This chapter concludes the sales comparison approach. The outline provided here can facilitate an indepth discussion of the following topics:
9.1
9.2
9.3
9.4
Basic Methods of Comparing Sales
Selecting and Using Units of Comparison
How to Estimate Dollar and Percent Adjustments
Arriving at an Indicated Value
Class Activities
[Instructor: Complete as needed.]
Lecture [ ] Discussion [ ] Breakout Groups [ ] Other _____________[ ]
9.1
BASIC METHODS OF COMPARING SALES
This section discusses (1) The Direct Comparison Method, and (2) The Elements of Comparison Method.
Finally, it describes the process of comparing and adjusting sales.
The Direct Comparison Method
This method is similar to the “curbstone” appraisal method used by early appraisers. Based on
“qualitative” adjustment vs. “quantitative” adjustment.
Technique
1.
2.
3.
4.
Locate sales that appear similar to the subject property.
Arrange or rank the sales, by listing them in the order of their overall appeal, price, etc.
Identify those clearly more desirable than the subject property as “Better,” those less desirable as
“Worse,” and others with a question mark.
The subject property should lie within the middle zone of the list.
[Instructor: See Example 9.1 in your textbook.]
Limitations


Differences among the sales should be relatively minor.
The direct comparison technique relies heavily on the appraiser’s intuition.
The Elements of Comparison Method
The critical characteristics of both the sales transaction and the subject property are referred to as the
elements of comparison.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 9
Elements of Comparison
Divided into four categories, these are referred to as the four “elements of comparison.”
Terms and Conditions of Sale.
adjusting for:
1.
2.
3.
The terms of the sale often affect the selling price. Consider
Seller financing (typically more favorable than a loan from a third-party lender)
Assumed financing
Seller-paid points (or payment of buyer’s closing costs by seller)
[Instructor: Adjusting for terms of sale is covered in Section 9.3.]
The conditions of sale must also be taken into account. Consider:
1.
2.
3.
4.
What property rights were conveyed?
What were the motives of the parties?
Was any personal property and/or tenant-improvements included?
Were there any seller concessions?
[Instructor: We suggest asking the class for their experiences with transactions where the price was
influenced by seller conditions, personal property, or unusual motives of the parties!]
Date of Sale. Investigating this element of comparison recognizes that:
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

Price levels constantly change.
Time adjustments are required to reflect any change.
Each sale price should be adjusted to the date of value for the subject property.
Location Elements. Important elements to consider include:
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
Condition and quality of neighborhood properties
Available utilities and transportation
Proximity of nuisances and/or hazards
Social, economic, and political forces
Physical Elements. Property and site characteristics to compare include:



The size, quality, age, condition of improvements and degree of modernization
The size, shape, and topography of the land parcel
Any observed problems
The Process of Comparing and Adjusting Sales
The Comparison Process
Comparing and analyzing sales allows the appraiser to:
1.
2.
Identify the significant differences among the sales.
Identify the differences between the sales and the subject.
The Adjustment Process
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Chapter 9
Sales prices are adjusted to reflect property and transaction differences between the subject and the sale
that are significant in the market.
Good results require that the appraiser:
1.
2.
3.
Use reasonable adjustment amounts.
Be consistent from one sale to another.
Adjustments must reduce the price spread indicated by the sold properties.
Rules for Making Adjustments
1.
2.
3.
Adjust the comparable sale price toward (to) the subject property.
Use market-related adjustments.
Make adjustments in the proper sequence. Usually:
a.
b.
Terms and conditions of sale
Time and market conditions
c.
d.
Location
Physical features
Types of Adjustments
Lump-sum Dollar Adjustments. This allows a specific dollar amount to be added or subtracted from the
price of a comparable sale, to make it “more like the subject.”
Percentage Adjustments. This type of adjustment uses percentage amounts instead of lump sum
amounts, to reflect the differences between the sale and the subject property. Two methods are
available, as follows, assuming in this example time and neighborhood adjustments of plus 4%
and plus 3%, respectively.
1.
The standard plus or minus method. Here is an example:
A plus 4% and plus 3% adjustment combine to total of +7%.
2.
Multiplying percentages together. Using examples above:
The +4% and +3% combine as 1.04 X 1.03 = 1.0712, or +7.12%
[Note: In practice percentage adjustments are usually added and subtracted.]
The Unit of Comparison Adjustment. This type of adjustment uses a price per unit (for example, the
price per square foot) developed from sales, to estimate the value of the subject property. (See the
next section for more!)
Using a Sales Adjustment Grid


Most appraisal report forms have a sales analysis or adjustment grid.
The URAR is an example. (See Figures 9.4 and 9.5 (with UAD) in your textbook.)
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Chapter 9
9.2 SELECTING AND USING UNITS OF COMPARISON
A unit of comparison is an important, variable aspect of the sale properties that can be measured, and then
used to compare and adjust to indicate the value of the subject.
Types of Units
Units of comparison include the total property, physical units, or economic units.
Total Property Comparison


The total property is the unit of comparison.
Differences are accounted for with the direct comparison method.
Physical Units of Comparison
These units are significant and objectively measured physical characteristics that vary among the sales.
1.
Examples of physical units of comparison:
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
Price per square foot of land or building
Price per acre (for larger land parcels)
Price per front foot
Price per apartment/motel unit
Price per room, bed or slip/berth, etc.
2.
Homes are usually compared by the selling price per square foot.
3.
Advantages of size-related units of comparison:


They eliminate size-related price variations.
They simplify the indicated value calculation.
Economic Units of Comparison
An economic unit of comparison is some economic characteristic of a property that closely relates to its
value.
1.
Examples of economic units of comparison:
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
2.
Price per buildable unit (for residential land)
Price per buildable square foot of commercial or office land
Price per bed (convalescent hospitals)
Price per pump, or per gallon pumped (gasoline stations)
Rent as a percent of sales volume (stores, other commercial)
Gross income multipliers, discussed next
Advantages of economic over physical units of comparison:


Economic units measure and compare the property’s utility.
A clearer analysis of price variations can result.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 9
[Instructor: Example 9.4 in your text provides a good example of the advantage of economic
units over physical units of comparison.]
Rent or Income Multipliers
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

Rent or income multipliers are also economic units of comparison.
They are calculated by dividing the sale price by the periodic rent or income.
Gross income multipliers will be studied further in Chapter 13.
Applying Units of Comparison
1.
Calculate the price per unit, using the unit being compared (for example, price per square foot)
for each sale.
2.
Analyze the prices per unit to identify the causes of any remaining price variation, for example:



3.
Time of sale
Age of structures
Number of units
Apply the indicated unit of comparison to the subject property.


Note that the price per unit tends to decline as the units increase in number.
When the range in price per unit is wide, the prices at the extremes often are less reliable.
Graphing the Sales
Variable units of comparison can easily be analyzed by graphing the sales.
1.
2.
3.
4.
5.
Set up a scale to compare total or unit selling price on one axis of the graph (usually the vertical
axis), with a major property characteristic (for example, size of living area) on the other axis.
For the first sale, mark the point on the graph paper that fits the selling price and the characteristic
of that sale. Repeat for all sales.
Draw a straight line which passes through the greatest number of the points graphed. This is the
“line of best fit.” The line also may be accurately plotted by using a linear regression calculation,
available in some financial calculators or using the Chart/Graphing tools in Excel spreadsheets.
Study which points fall above and below the line. Note whether these can be explained by unique
characteristics of the particular sales.
Estimate where the subject property would fall on the line and whether above or below the line.
The result is the value or unit value indicated by this method.
[Note: The use of graphs to support valuations or demonstrate trends has gained acceptance in
recent years, and their use is expected by some Clients.]
9.3 HOW TO ESTIMATE DOLLAR & PERCENT ADJUSTMENTS
The methods listed here all depend directly or indirectly on market inputs.
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Chapter 9
Direct Market Method
Often referred to as a “matched pair” method, this method uses the difference in price between two
similar properties or sets of properties, to suggest the appropriate dollar or percent adjustment for
a notable difference.
How to Use Matched Pairs
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

Find at least two similar sales that differ only in one feature.
Compare the sales prices to find the dollar or percentage difference.
Adjust the sale prices of the comparables by the indicated amount or percentage.
Application
The matched pair method is the most reliable when only one factor is being adjusted, for example, terms,
date of sale, location or physical factor.
[Instructor: See Example 9.5 in your textbook.]
Depreciated Cost Method
1.
2.
3.
4.
Select the specific feature or difference to be adjusted (for example, square foot size).
Estimate the additional cost (new) to include that feature.
Deduct an allowance (called depreciation) for age and condition.
Use the depreciated cost amount to adjust the sale price.
[Instructor: See Example 9.7 in your textbook.]
Adjusting for Sale Terms or Conditions
1.
Adjustments should be made for unique financing terms. Examples:




Subtract any seller-paid loan points from the selling price.
Subtract the “premium” value of any favorable loan.
Add the penalty of any unfavorable loan to the selling price.
Estimate loan adjustment amounts by an analysis of market discount rates from sales, the
trust deed market, or from mathematical techniques.
[Instructor: See Example 9.8 in your textbook.]
2.
Practical Limitations:


Assumptions about how buyers and sellers view below-market financing are difficult to make
and to support.
Mathematical adjustments tend to be very precise; yet few buyers and sellers use them.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 9
Statistics--Linear and Multiple Regression
1.
Linear regression (single variable):




2.
Adjusts for only one difference or variable, for example, date or age.
Assumes that the price/variable relationship is a straight line, usually.
Is featured in some pocket calculators.
Can be used to derive and/or support adjustment amounts.
Multiple regression:
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


Accepts any number of variables.
Uses a programmable calculator or computer.
Requires a large number of sales; a minimum of 20 to 30 sales needed.
Limited past application because of its complexity, but used more in recent years along with
advancements in appraisal education and software.
Automated Valuation Models (AVMs)

These are computer software programs that analyze data using an automated process.

Some AVMs use a form of regression analysis, described above.

A number of AVM models have been used by lending institutions and county assessors as
valuation tools.

When applied to an individual property, the output of an AVM is not, by itself, considered to be
an appraisal. However, the output may be analyzed by an appraiser and become part of an
appraisal, if found to be credible and reliable.
9.4 ARRIVING AT AN INDICATED VALUE
Four steps are suggested to arrive at an indicated value:
The First Step: Review the Entire Approach
Consider the limitations of the sales comparison approach and how these limitations apply to the appraisal
assignment.
Comparability


For example, the sales comparison approach is most useful when there are adequate numbers of
comparable sales.
Unique or specialized property should be appraised with other methods vs. sales comparison.
Activity Levels


The sales comparison approach is most reliable in an active market.
Market activity must include the type of property under appraisal.
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Chapter 9
Adjustment Accuracy
When large adjustments are required, they need to be based on market evidence, or the sales comparison
approach may not be reliable. The final appraisal conclusion is only as reliable as the adjustments.
Statistical Limits
Some statistical techniques are flawed, particularly with small numbers of sales.
Lagging the Market
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
Sales tend to “lag” behind a changing market, or miss sudden changes.
Uneven markets produce difficult time adjustment problems.
Motivation
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

The sales comparison approach assumes arm’s-length bargaining between knowledgeable parties.
Actual sales prices are not always reached in this way.
Motivation is difficult to establish.
The Second Step: Review the Sales Data
Sales Data


Consider the reliability of the data, as to both its source and the details.
Where needed, double-check the information in question.
Reviewing the Adjustments



Those derived from direct market comparisons are the most reliable.
Consider the total amount that each sale was adjusted.
The sales with the least total adjustment usually should be given the most weight.
The Third Step: Estimate a Value Range
The upper and lower limits of this range are the highest and lowest prices that can reasonably be
concluded, based on the sales study.
Using the Value Range Produced by the Adjusted Sales


The range between the highest and the lowest adjusted sales may be used to bracket the property
value.
Such value indication is the most valid when small, well-supported adjustments have been used.
Projecting Upper and Lower Limits for the Sales Adjustments
1.
2
3.
4.
Apply upper and lower limits to the individual sales adjustments.
Add sales prices to each extreme to suggest both the highest and the lowest reasonable price.
A range of indicated value is produced for each comparable sale.
The narrower this range, the more reliable is the value conclusion.
[Instructor: See Figure 9.10 in your textbook.]
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 9
The Range of Value from the Most Comparable Sales
1.
2.
Consider only those sales that are the most reliable value indicators.
Select from the narrowest range of the most comparable sales.
The Fourth Step: Select a Final Value
1.
2.
3.
Give the greatest weight to the sale or sales that need the least total “absolute” adjustment (i.e.,
ignoring the plus and minus signs).
Favor the sales that involve the fewest assumptions or the most reliable adjustments.
Do not average the adjusted sales prices. Averaging assumes that differences in price are pure
chance.
SUMMARY
[Instructor: The following list of terms can be useful in the chapter review.]
Important Terms and Concepts
Automated valuation models
(AVMs)
Comparison process
Date of sale
Depreciated cost method
Direct comparison method
Economic unit of comparison
Elements of comparison
method
Gross income multipliers
(GIM)
Linear regression
Location elements
Lump-sum dollar adjustment
Matched pair
Multiple regression
Percentage adjustment
Physical elements
Physical unit of comparison
Sales adjustment grid
Sales graph
Terms and conditions of sale
Total property comparison
Unit of comparison
Value range
REVIEWING YOUR UNDERSTANDING
[Instructor: See end of text chapter for student review questions.]
STUDENT EXERCISES
[Instructor: Suggested Multiple Choice and True/False questions are available to use for Chapter
9.]
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