1. Analyzing and Adjusting Comparable Sales Basic Real Estate Appraisal: Principle & Procedure – 9 th Edition © 2015 OnCourse Learning Chapter 9

2. STUDENT LEARNING OUTCOMES Name the Four Elements of Sales Comparison List Three Rules for Making Adjustments Name the Three Types of Adjustments Most Commonly Used Explain How a Value Conclusion is Reached 2 Page 270 © 2015 OnCourse Learning

3. 9.1 BASIC METHODS OF COMPARING SALES Qualitative vs. Quantitative Adjustments Direct Comparison Method has Limitations – Relies on “Intuition”, but a good cross-check 3 Page 271 © 2015 OnCourse Learning

4. ELEMENTS OF COMPARISON METHOD The Four Elements of Comparison Terms and Conditions of Sale Date of Sale Location Elements Physical Elements Detailed on the following slides 4 Page 273 © 2015 OnCourse Learning

5. 1. TERMS OF SALE Seller Financing More Favorable than Third-Party Lender terms? Unfavorable? Assumed Financing Favorable or Unfavorable? Seller-Paid Points or Closing Costs Generally, Buyer pays Points In a Buyer’s Market, Seller may pay Points 5 Page 274 © 2015 OnCourse Learning

6. 1. CONDITIONS OF SALE (Con’t.) Property Rights Conveyed Unusual Easements Lease Terms – Favorable to Tenants? Motives of the Parties Arm’s-Length Adequate Market Exposure Personal Property/Tenant Improvements Seller Concessions 6 Page 274 © 2015 OnCourse Learning

7. ELEMENTS OF COMPARISON (Con’t.) 2.Date of Sale Market Conditions Influence Price Time of Sale vs. Date of Value 3.Location Elements Desirability Do Prices Differ Due to Location? 4.Physical Elements Size, Quality, Conditions, Age, etc. Specific Features / Degree of Modernization 7 Page 275 © 2015 OnCourse Learning

8. COMPARING & ADJUSTING SALES Comparison Process Compare and Analyze the Four Elements of Comparison Are Feature Differences and Price Differences Connected? Adjustment Process Are Market-Derived Adjustments Reasonable? Should be Applied Consistently to Each Sale Should Reduce Price Spread Between Sales 8 Page 275 © 2015 OnCourse Learning

9. RULES FOR MAKING ADJUSTMENTS Adjust the Sale to the Subject! Make the Sale to be More Like the Subject 9 Page 277 © 2015 OnCourse Learning

10. RULES FOR ADJUSTMENTS (Con’t.) Use Market-Derived Adjustments Reflect the Market’s Reaction Adjust in the Proper Sequence From General to Specific Terms & Conditions of Sale Date of Sale Location Elements Physical Elements 10 Page 278 © 2015 OnCourse Learning

11. TYPES OF ADJUSTMENTS Lump-Sum Dollars Percentage Units of Comparison 11 Page 278 © 2015 OnCourse Learning

12. USING A SALES ADJUSTMENT GRID 12 Page 281 © 2015 OnCourse Learning

13. 9.3 SELECTING AND USING UNITS OF COMPARISON Detailed on the following slides 13 Page 281 © 2015 OnCourse Learning

14. TYPES OF UNITS OF COMPARISON Total Property Prices for Similar Properties Minor Differences Accounted for by Ranking the Sales Physical Units Price per Square Foot or Acre Price per Room Price per Dwelling Unit (See Example 9.3) 14 Page 285 © 2015 OnCourse Learning

15. UNITS OF COMPARISON TYPES (Con’t.) Economic Units of Comparison Price per Buildable Dwelling Unit Price per Developable Building Area Gross Income Multipliers Applying Units of Comparison Identify Why Unit Prices Differ As Units (Size) Increases / Unit Price may Decrease 15 Page 287 © 2015 OnCourse Learning

16. GRAPHING THE SALES 16 Page 291 © 2015 OnCourse Learning

17. 9.3 HOW TO ESTIMATE DOLLAR AND PERCENT ADJUSTMENTS Direct Market Method Matched Pair – At least Two Sales that can be Compared to Estimate the Price Difference Caused by One Characteristic Example 9.5 – Finding Adjustment for Size Subject contains 2,600 SF Gross Living Area Sale are Similar Except for GLA Size See Next Slide 17 Page 293 © 2015 OnCourse Learning

18. EXAMPLE 9.5 - USING MATCHED PAIRS Calculation For Size Adjustment Adjustment: $10,000 ÷ 200 SF = $50 per SF 18 Page 295 © 2015 OnCourse Learning Sale #Size (SF)Sale Price #22,700$280,000 #12,500$270,000 Difference 200 $10,000

19. DEPRECIATED COST METHOD Best Application is When Estimating an Adjustment for Physical Differences Represents an Indirect Method, based in part on Market Data Example 9.7 - Finding a Garage Adjustment Subject has a 440 SF Garage Comparable Sale has No Garage Problem – Finding Amount to Adjust the Sale 19 Page 296 © 2015 OnCourse Learning

20. DEPRECIATED COST METHOD (Con’t.) Cost New: 440 SF @ $43.50 =$19,140 Less: Depreciation Cost New$19,140 Age is 60 Yrs. Life Expectancy 100 Yrs. Depreciation: 60 ÷ 100 = X 0.60 Equals: Depreciation in $- 11,484 Equals: Adjustment Amount for Garage:$ 7,656 Rounded:$ 7,700 20 Page 297 © 2015 OnCourse Learning

21. ADJUSTING FOR SALE TERMS OR CONDITIONS 21 Page 298 © 2015 OnCourse Learning

22. STATISTICS - LINEAR REGRESSION 22 Page 300 © 2015 OnCourse Learning

23. STATISTICS – MULTIPLE REGRESSION Can Analyze Multiple Variables, versus a Single Variable (Linear Regression) Requires a minimum of 20 to 30 sales (properties) Used by Assessors (Mass Appraisals) and Lenders (Appraisal Reviews) Now Used as a Valuation Tool and for Supporting Adjustments by Appraisers CompCruncher & Redstone are examples of programs by Bradford Software 23 Page 301 © 2015 OnCourse Learning

24. STATISTICS – MULTIPLE REGRESSION Sample Results (Output) Source: Redstone User’s Guide, v. 1.0.25 www.BradfordSoftware.com/Redstone 24 Page 301 © 2015 OnCourse Learning

25. AUTOMATED VALUATION MODELS Computer Software Programs (AVM) Many use a form of Multiple Regression Analyzes Data in Specified Area or Neighborhood Relates Results of Database Search to Subject Property Information Imputed into the Model (e.g. Zillow.com) When Applied to an Individual Property it is Not an Appraisal (without an Appraiser) An AVM May Become the Basis for an Appraisal (if Output is judged Reliable) 25 Page 301 © 2015 OnCourse Learning

26. 9.4 ARRIVING AT AN INDICATED VALUE Four Steps to Arrive at a Conclusion 1.Review the Entire Approach 2.Review the Sales Data 3.Estimate a Value Range 4.Select a Final Value (i.e. Reconciliation) Detailed on the following slides 26 Page 302 © 2015 OnCourse Learning

27. #1 – REVIEW THE ENTIRE APPROACH Comparability of Sales Selected Activity Levels Adjustment Accuracy Statistical Limits Lagging the Market Motivation / Knowledgeable Parties 27 Page 302 © 2015 OnCourse Learning

28. #2 – REVIEW THE SALES DATA Sales Data Consider Reliability of Information Enough Information on Each Sale? Look Back at Motivations – Particularly on one Key and Important Sale Reviewing Adjustments Consider Types of Adjustments / Reliability Consider $ Amounts & Percentages (Net/Gross) 28 Page 304 © 2015 OnCourse Learning

29. #3 – ESTIMATE A VALUE RANGE May not be Necessary if Data are quite Comparable and Range is Tight Using the Range of Adjusted Sales Prices Consider Upper and Lower Limits of Range Range of Value from Most Comparable Sales Do Indicators by Most Comparable Sales Cluster in High or Low End of the Range ? 29 Page 305 © 2015 OnCourse Learning

30. #4 – SELECT A FINAL VALUE Not a Mathematical Calculation – the Process Requires Judgment! 30 Page 306 © 2015 OnCourse Learning

31. CHAPTER SUMMARY Analyzing and adjusting comparable sales rely on two main methods: the Direct Comparison Method and the Elements of Comparison Method. The Direct Comparison Method simply compares the overall desirability of each sold property with that of the subject, without any quantitative adjustments. 31 Page 307 © 2015 OnCourse Learning

32. CHAPTER SUMMARY (Con’t.) The Elements of Comparison Method compares the sales with reference to the details of four critical elements: the Terms and Conditions of Sale, the Time of Sale, the Location elements, and the Physical Elements of the properties. Arriving at a Value Conclusion requires a Review of the Entire Approach, a Review of the Sales Data, Estimating a Value Range, and the Selecting a Final Value. 32 Page 308 © 2015 OnCourse Learning

33. IMPORTANT TERMS & CONCEPTS Automated Valuation Model (AVM)Matched Pair Comparison ProcessMultiple Regression Date of SalePercentage Adjustment Depreciated Cost MethodPhysical Elements Direct Comparison MethodPhysical Unit of Comparison Economic Unit of ComparisonSales Adjustment Grid Elements of Comparison MethodSales Graph Gross Income Multiplier (GIM)Terms and Conditions of Sale Linear RegressionTotal Property Comparison Location ElementsUnit of Comparison Lump-Sum Dollar AdjustmentValue Range 33 Page 309 © 2015 OnCourse Learning