Sales Comparison Approach

1. Sales Comparison Approach Wayne Foss, MBA, MAI, CRE Foss Consulting Group Email: wfoss@fossconsult.com

2. Sales Comparison Approach • Premise: • The market value of a property is directly related to sales prices of comparable competitive properties.

3. Sales Comparison Approach • Principles involved include • Substitution • Contribution • Anticipation • Supply and Demand

4. 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

5. 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 . . . . .

6. 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.

7. 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

8. 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….

9. Sales Comparison Approach • Values “as-if…” can be considered • Best when appraiser has highly similar sales data and • The comparisons are appropriately analyzed

10. 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

11. 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

12. 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

13. 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!

14. 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.)

15. 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)

16. 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

17. The Fifth Step, con’t…... 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 comparable’s sale price. • The result is an adjusted price indicated by each comparable; then together they provide several value indications for the appraised property.

18. 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.

19. 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

20. 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

21. Thoughts and Comments, con’t... • 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.

22. So that’s 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: (714) 871-3585 Fax: (714) 871-8123 Email: wfoss@fossconsult.com