Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 8
CHAPTER 8
THE SALES COMPARISON APPROACH
STUDENT LEARNING OUTCOMES
This chapter introduces the sales comparison approach. The analysis and adjusting of sales will be
covered in Chapter 9. Topics here include:
8.1
8.2
8.3
8.4
Introducing the Sales Comparison Approach
Collecting Comparable Sales Data
Data Resources on the Internet
Appraisal Statistical Concepts
Class Activities
[Instructor: Complete as needed.]
Lecture [ ] Discussion [ ] Breakout Groups [ ] Other _____________[ ]
8.1 INTRODUCING THE SALES COMPARISON APPROACH
The sales comparison approach often is the most important of the value approaches.
Outline of the Sales Comparison Approach
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Research and collect recent sales of properties comparable to the subject property.
Analyze these sales and compare them to each other and with the subject property.
Adjust for the differences between the sales and the subject property.
Arrive at a value estimate as indicated by the adjusted sales.
Key Concepts of the Sales Comparison Approach
The Importance of Substitution
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2.
The sales comparison approach is based on the principle of substitution.
This process is commonly used by buyers and sellers.
Simplicity
The sales comparison approach is simple because it:
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Is the most direct approach.
Requires fewer calculations.
Easiest to understand.
Easiest to explain.
Statistical Connections
The sales comparison approach is related to statistics because it:
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 8
1.
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Uses a sampling of market activities.
Identifies market patterns.
Seeks to locate sales that bracket the key characteristics of the subject property.
[Instructor: See Section 8.3 for an outline of statistical concepts.]
Adjustments
The sales comparison approach offers sales analysis and adjustment methods that can:
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Help identify the property features that are affecting the selling price.
Suggest how much to adjust the price(s) for any particular difference.
Allow an objective review of the appraisal.
Use of Market Data In Other Approaches
Each of the three approaches to value relies upon market data:
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The sales comparison approach makes direct use of market sales data.
The cost approach uses vacant land sales to estimate land value, and analyzes improved sales to
estimate accrued depreciation.
The income approach uses rents, vacancy rates, expenses, and capitalization rates that are all
based upon market data.
8.2 COLLECTING COMPARABLE SALES DATA
Selecting the Comparable Sales
A sale must meet three criteria to be a valid comparable. It must be a competitive property, an open
market transaction, and a sale close in time to the date of value.
The Competitive Property
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Location: one that a buyer of the subject property would also consider.
Physical characteristics: must meet the needs of that prospective buyer.
Appeal: attracts the same buyer group, or “sub-market”.
Open Market Transactions
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Arm’s-length sales
Adequate market exposure
No unusual terms or conditions, such as seller concessions
Date of Sale
The date of sale should be close to the date of value, depending on:
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Supply and demand changes
Market attitude changes
General and local market trends
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Chapter 8
How Comparable Must a Comparable Be?
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As comparable as you can find!
Market sales should be similar in time, location, and important characteristics.
Finding an adequate number of comparables may require that you widen the acceptable criteria,
for example, the age of the house.
Defining the Sales Search Area
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In a market with a lot of sales, or similar property, the area will be smaller.
With few sales, and/or an unusual property, the area may be very wide.
Consider the Sales History of the Subject Property
USPAP requires the following:
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2.
Consider/analyze any agreement of sale, option, or listing around the time of the date of value.
Consider and analyze prior sales of the subject property within three years of the date of value (if
available in the normal course of business).
What Information Is Needed?
Pertinent information is needed about each sales transaction, and the particulars of each comparable sale.
The Sales Transaction Data
The data collected for each comparable should include:
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Date of sale: ideally, the date the sale price was agreed upon
Sales price, terms of sale, type, amount, and details of financing
Items of personal property included in the sale, or other seller concessions
Address and legal description
Names of grantor (seller) and grantee (buyer)
Motivation for sale (seller) and purchase (buyer)
Income and expense information, as appropriate (i.e. property interest acquired)
Physical Characteristics of the Sale
The data collected for each comparable (in light of UAD) should include:
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Land size, shape, topography, soil, etc.
The size and nature of structures; distinguish the above- and below-grade finished areas
The age and quality of design and construction
Special features, e.g., built-ins, bathrooms, equipment, and yard improvements; notable property
features, such as desirable or undesirable views
The condition and quality of the structure; note any modernization (level of work/time-frame)
Available utilities
Any negative features, e.g., room sizes, poor floor plans, deferred maintenance, inadequate
wiring, roof leaks, landslides, etc.
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Legal Data about the Comparable Sale
The data collected for each comparable should include:
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Zoning category; permitted uses
Current and future property taxes (special tax assessments)
Public and private restrictions, easements, leases
Location of the Sale
Note any important differences from the subject property, regarding:
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Public transportation
Proximity to freeways, jobs, schools, cultural facilities, local shopping, and recreational facilities
Detrimental influences such as traffic noise, incompatible land uses, and/or possible
natural hazards
The age, value, quality, condition, and use of surrounding properties
Market Conditions
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Consider the state of the market at the time of the sale.
Compare with the state of the market at the date of value.
Using Listings and Offers
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Listings can show market trends, and may indicate the upper limits of value.
Refused offers can suggest the lower limits of value.
Use of listings is often the result of a client requirement to include them.
Particularly important in uncertain or rapidly changing markets.
How Many Sales?
The number of sales needed in any appraisal depends on:
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How good the comparables are.
The reliability of the data.
The analysis technique used.
How the report will be used.
Verification of Data
Ways to improve the reliability of sales information include:
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Field inspection of the sales.
An exterior view is adequate for most appraisals.
An interior view may be required in complex assignments.
Try to identify any changes made since the sale date.
Verification of price, terms, and property characteristics with seller, buyer, or agent.
[Note: The extent of verification could depend on the Intended Use and/or Scope of Work (Client
expectations).
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Sources of Market Data
Public Records
Public offices, and the data they may be able to provide, include:
1.
Recorder or County Clerk’s office:
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Grant deeds and other ownership change records (documentary transfer tax)
Deeds of trust, mortgages, assignments of rent, etc.
Assessors’ offices:
a.
Assessor’s parcel numbers, assessed values, current owners of record, etc. as found on
the assessment roll.
b.
General property information may include:
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Owners of record
Date and document number of recent property transfers
Sellers’ reports of change of ownership: price and terms
Legal descriptions and parcel maps
Property addresses
Lists of recent sales
Property data may include zoning category, the type of present use, and the size, quality,
class and age of buildings.
Multiple Listing Services
Usually sponsored by local Boards of Realtors, multiple listing services:
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Compile and regularly publish member listings and recent sales.
Often maintain a listings database, accessible by personal computers (via Internet).
Restrict access to members; licensed/certified appraisers may qualify.
MLS data can often be directly downloaded (improved effiency).
Data Services
1.
Data Express: National Collateral Database by FNC, Inc.:
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Sales data are generated by cooperating lenders and appraisers.
Service includes monthly sales books; computer downloads via Internet, etc.
Available assessor’s data is often integrated into sales reports.
[Note: See Figure 8-10 in your text for a sample Data Express sales data listing from FNC.]
2.
Dataquick, CoreLogic’s Sitex Data and other private firms may offer:
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Public records (assessment and transfer information)
Listings, recent sales, and deed copies
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On-line property data (print-out or downloadable)
Compact Disc/Read Only Memory (CD/ROM) data discs
Comparables and property profiles.
Title insurance companies:
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Microfilm or computer files of public records with computerized indices
Assessment, sales transfer, deeds, and other records
Property profiles
The Internet
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Now a major source of appraiser data.
Some is free; some requires a subscription.
Parties to the Transaction
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Buyers, sellers and their agents have first-hand information.
Involved lenders may be able to provide information.
Appraisal Office Data Files
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Many appraisers keep private market data files.
Appraisers sometimes share their sales data with other appraisers.
8.3 DATA RESOURCES ON THE INTERNET
Data resources on the internet that are the most useful to appraisers may be found on websites maintained
by government agencies, industry service organizations, and trade associations connected to real estate.
Websites of Government Agencies
Many local, state and federal government agencies publish data on the economy as well as regulatory
information on their websites.
General Data On the Economy
Federal government agencies offering general data on the economy and the environment, as well as social
and economic statistics, include the following sites:
Bureau of Labor Statistics
http://stats.bls.gov/
Bureau of Labor Statistics, “U.S. Economy at a Glance”
http://www.bls.gov/eag/eag.us.htm
Census Bureau
http://www.census.gov/
Dep’t. of Commerce, Bureau of Economic Analysis
http://www.bea.gov/
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U.S. Congress, Economic Indicators of the Joint Economic Committee
http://www.gpo.gov/fdsys
Federal Housing Finance Agency, House Price Index
http://www.fhfa.gov/Default.aspx?Page=14
Regulatory Information
Many government regulatory agencies post their regulations, handbooks and forms on the internet for use
by affected institutions, as well as by appraisers. In many cases such material may be downloaded.
Dep’t. of Housing and Urban Development
http://www.hud.gov/
Environmental Protection Agency
http://www.epa.gov/
Fannie Mae
http://www.efanniemae.com/
Federal Emergency Management Agency
http://www.fema.gov/
Federal Emergency Management Agency, Flood Map Service
http://www.msc.fema.gov/
Freddie Mac
http://www.freddiemac.com/
The Appraisal Subcommittee
http://www.asc.gov/
The Appraisal Foundation
http://www.appraisalfoundation.org/
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Websites of Industry Service Organizations
Many real estate research and service organizations provide the real estate, construction, and appraisal
industries with useful data on the internet. Access is often by subscription only.
Comparable Sales
Lender Processing Services – Sitex Data
http://www.sitexdata.com
Dataquick Property Finder
http://www.dataquick.com/
CoreLogic – RealQuest
http://www.realquest.com/
National Collateral Database – Data Express
http://www.collateraldna.com/dataexpress.aspx
LoopNet
http://www.loopnet.com
CoStar Group – COMPS Express
http://www.costar.com/products/compsExpress
National Association of Realtors
http://www.realtor.com
Homescout – Listings
http://www.homescout.com
Cost and Construction
Marshall & Swift Company Group– Cost Data
http://www.marshallswift.com/
R. S. Means Company – Cost Data
http://www.rsmeans.com/
General and Other Sites
Building Owners & Managers Association
http://www.boma.org/
Engineering News-Record
http://www.enr.com/
Realty Rates
http://www.realtyrates.com
Motgage Bankers Association of America – Forecasts
http://www.mbaa.org/ResearchandForecasts/
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ULI/PricewaterhouseCoopers – Emerging Trends in Real Estate
http://www.uli.org/ResearchandPublications.aspx
Websites of Trade Associations
Trade association websites with connections to real estate include the following:
American Society of Appraisers
http://www.appraisers.org/
Appraisal Institute
http://www.appraisalinstitute.org/
National Association of REALTORS®
http://www.realtor.com/
Real Estate Educators Association
http://www.reea.org/
Society of Industrial and Office Realtors – Commercial Real Estate Index
http://www.sior.com/
AIA - Market Segment Consensus Growth Forecasts
http://www.aia.org/aiarchitect/
NAIOP: Vital Signs Survey
http://www.naiop.org/
8.4 APPRAISAL STATISTICAL CONCEPTS
1.
Central tendency can suggest the typical size, price, or other important variable. Measures of
central tendency include the following:
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Mean - the average numeric “value” of the sample, that is, the average price, or average size
Median - the middle value, that is, the one with as many values greater than it as values less
than it in the sample
Mode - the value that occurs the most often
Range - the difference or spread between the highest and lowest value in the sample
Standard Deviation - a measurement of whether the observations are clustered close to the
mean, or instead spread throughout the range
Linear and multiple regression.
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Calculates the relationships between property characteristics (variables) and selling prices,
producing a formula.
An indicated value or range of values for the subject property may then be calculated.
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Chapter 8
SUMMARY
[Instructor: Review the following terms to summarize this session.]
Important Terms and Concepts
Adjustment techniques
Assessment roll
Bracketing
Buyer’s motives
Central tendency
Comparable sales
Comparable sale search area
Competitive property
Concessions
Linear and multiple
regressions
Location
Mean
Median
Mode
Open-market transaction
Physical characteristics
Public records
Range
Sales comparison approach
Sales history
Sample
Seller’s motives
Standard deviation
Submarket
Terms of sale
Variable
Verification
REVIEWING YOUR UNDERSTANDING
[Instructor: See end of text chapter for review questions.]
STUDENT EXERCISES
[Instructor: Suggested Multiple Choice and True/False questions are available to use for Chapter
8.]
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