Ch. 7 Sales Comparison Approach - Principles and Data Sources

Obviously, ________ from __________________ that have ____________ are the most ______________ However, we can gain additional insight into the workings of the local market by examining listings and offers to purchase. Unsold listings will tend to give us an upper limit of value. Properties that are in contract but have not closed may also produce valuable information; particularly in a market that is undergoing a rapid upward or downward change. There may not have been closed transactions that would reflect the new price levels

data, transactions, closed, pertinent

A ________________: "A neighborhood characterized by homogeneous land use, e.g., apartment, commercial, industrial, agricultural."

district

Your job as an appraiser is _____________ when the subject is located in a well-______________ neighborhood (like a _________________), where you can find many similar or almost-identical properties. In this case, the market boundary will be the subdivision itself. For a unique or unusually high-end property, you may have to extend your search for data to a larger geographic region to find comparables.

easiest, defined, subdivision

Here's an example of how the adjustment process is employed. The subject is a three-bedroom home that is 15 years old. It has a brand new kitchen. The comparable is a similar house in the same neighborhood, also 15 years old, but with its original kitchen. Through market research and analysis, we determined that new kitchens in this market area have a contributory value of $12,000. The comparable sold for $200,000. The subject is therefore worth: $200,000 + $12,000 = $_____________

$212,000

Step ___ of the process is verification. We need to verify information in order to assure its accuracy. STANDARD ___ of __________ states, in part, "An appraiser must...correctly ________________ research and analyses necessary to produce a _____________ appraisal."1 STANDARD ___ says: "In reporting the results of a real property appraisal, an appraiser must ______________________ each analysis, opinion, and conclusion in a manner that is not misleading."2

2, 1, USPAP, complete, credible, 2, communicate

In Step ____ of the _____________ comparison approach process, we identify differences and make adjustments. If we had a perfect comparable, no adjustments would be necessary. Presume a property identical to the subject property just sold for $235,000. It wouldn't take a genius to opine that the value of the subject was, by comparison, $235,000. Unfortunately, this is rarely the situation encountered in the real world of residential real property appraisal. It is even less likely if we're appraising commercial or industrial property. First, we have to identify pertinent, significant differences between the subject property and each comparable sale. We do not make an adjustment for every single, observable difference. We only make adjustments for differences that are significant enough to be recognized by a typical purchaser and a strong enough influence to result in a modification in his or her buying decision. Secondly, we have to analyze the available data to extract and support the dollar amount, or percentage amount, that will be ascribed to each different feature or attribute. We will get into details of this process later in the course. For convenience of analysis, appraisers generally array details of the subject property and the comparable sales on a data grid. This is a feature in most appraisal forms.

4, sales

_________________ may be able to gather __________________ on other indications of ___________, which might include: ---Listings ---Offers to purchase ---Refusals ---Options to purchase ---Contracts on properties that have yet to close

Appraisers, information, value

For what type of property might the sales comparison approach NOT be an applicable approach to value? A) a duplex B) a commercial office building C) an unusual or one-of-a-kind design home D) a tract home in a subdivision

C) an unusual or one-of-a-kind design home

Which of the following would be considered a source of specific data? A) U.S. Census Bureau B) personal inspection C) deed D) tax bill

C) deed

In applying comparative analysis, an appraiser may employ A) qualitative techniques only B) quantitative techniques only C) quantitative or qualitative techniques, either separately or in combination D) quantitative or qualitative techniques separately, but not together

C) quantitative or qualitative techniques, either separately or in combination

Principle of _______________________: "1. The amount a component of a property adds to the total value of the property. Contribution may or may not be equivalent to the cost to add the component. 2. The concept that the value of a particular component is measured in terms of the amount it adds to the value of the whole property or as the amount that its absence would detract from the value of the whole."

Contribution

Comp C sold for $127,000 and has 2,450 square feet. Comp D is essentially identical, except that it has 2,675 square feet and it sold for $136,000. What is the indicated adjustment per square foot? A) $8 B) $32.50 C) $38 D) $40

D) $40

Which of the following would be considered a source of comparable sale data? A) MLS B) appraiser's own files C) the internet D) all of the above

D) all of the above

Price per square foot of gross living area is a common unit of comparison when appraising A) offices B) 2-4 unit properties C) vacant land D) one-unit residences

D) one-unit residences

Appraisers may be able to gather information on other indications of value, which might include: ---Listings ---__________ to purchase ---Refusals ---____________ to purchase ---Contracts on properties that have yet to close

Offers, Options

Specific data is defined as "Details about the property being appraised, comparable sale and rental properties, and relevant local market characteristics." Specific data must be gathered about the subject property each time, and is different for each appraisal assignment. Each parcel of real property is unique and has unique characteristics. Conversely, you may already have a large amount of general data concerning properties in the subject neighborhood. Perhaps you have appraised many properties in that neighborhood in the past, and you have a good head start on collecting the general data for the market area. But as the name implies, specific data will pertain specifically to the subject property _________________ data concerning a subject property would include information about the legal characteristics of the subject property, along with pertinent governmental influences and the specific physical characteristics. In the space below please make a list of at least 10 documents or sources from which you might obtain specific data. Deeds, Location Maps, Tax Maps, Flood Maps, Assessor's records, Title companies, Zoning ordinances, Multiple listing services, and more. Here are some suggested sources of specific information. However, the list of possibilities is much more extensive and will vary from a locale to locale. Personal inspection Homeowner Deed Lease(s) Assessment record Tax bill Survey Site plan Title document Homeowners Association declaration and bylaws MLS listing Sales agreement Previous appraisal Home inspection report Blueprints Sales brochure Condominium documents Zoning documents Master plan Building code Environmental assessment Building cost estimate

Specific

True or False: Qualitative analysis uses percentages adjustments, while quantitative analysis uses specific dollar adjustments.

False

______________ is "the process by which a value indication is derived in the sales comparison approach". A) Comparative analysis B) Bracketing C) Adjustment analysis D) Quantitative analysis

A) Comparative analysis

Which of the following would NOT be considered a source of specific data? A) U.S. Census Bureau B) personal inspection C) deed D) tax bill

A) U.S. Census Bureau

In the URAR, concerning verification, you are asked to provide the ____________ and the __________. A) data source, verification source B) verification source, date of data C) data source, date of data D) verification source, email address of source

A) data source, verification source

What type of analysis is used for elements that cannot be given a numerical value? A) qualitative B) quantitative C) percentage D) units of comparison

A) qualitative

The primary principle upon which the cost and sales comparison approaches are based is the principle of ________________. A) substitution B) change C) externalities D) supply and demand

A) substitution

Two virtually identical houses are offered for sale in a subdivision. House A is listed for $129,900 and House B is listed for $169,000. House A has been shown 12 times and there are 4 offers pending, while House B has been shown twice and there have been no offers. Which appraisal principle is being demonstrated here? A) substitution B) contribution C) balance D) externalities

A) substitution

Traditionally, appraisers have used a minimum of _____ comparable sales in the sales comparison approach. A) 2 B) 3 C) 5 D) 6

B) 3

Specific data is A) usually gathered from an online source, such as the U.S. Census Bureau B) different for each appraisal assignment C) not as important as general data D) the same for all appraisals performed in the same market area

B) different for each appraisal assignment

The first step in the sales comparison approach is A) verify the information B) research the market C) select relevant units of comparison D) identify differences and make adjustments

B) research the market

Which of these is NOT another name for the sales comparison approach? A) direct sales comparison approach B) sales capitalization approach C) market approach D) market data approach

B) sales capitalization approach

You are conversing with an appraiser who has been in the profession for 40 years, and he mentions the term "market approach". What approach to value is he probably referring to? A) income capitalization B) sales comparison C) cost D) discounted cash flow analysis (DCF)

B) sales comparison

_______________-producing properties are generally appraised with the income capitalization approach, but the sales comparison approach can also be developed on these types of properties, assuming adequate data is available. The cost approach may also be applied to these types of properties.

Income

_____________ analysis of data is important, but we need to make sure that our starting point is factual and true. It is crucial to verify this information to gain an understanding of the motivation behind each transaction. We need to ascertain if the elements of the transaction were atypical in any aspect. If so, we may need to adjust the price of the transaction or, in some cases, discard it entirely from our analysis. A transaction should, if at all possible, be verified with a party who has firsthand knowledge of the transaction, such as the buyer or seller, or a broker or agent involved in the transaction.

Proper,

Principle of __________________________: "The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based."

Substitution

True or False: Qualitative analysis is used for elements that cannot be given a numerical value.

True

True or False? Any type of duress, whether on the part of the buyer or seller, can impact the sales price of property.

True

True or False? Comparable sales are ones that would be truly comparable or competitive in the mind of a typical purchaser.

True

True or False? Driving through the area often gives a good idea of neighborhood boundaries. You will get a "feel" for where there is a distinct change in architectural style, age of home, income level, transition from single-family to multi-family housing, and so on.

True

True or False? General data includes items of information on value influences that originate outside the property being appraised.

True

True or False? Houses that are priced much too high can (and usually do) remain unsold.

True

True or False? Trust your instincts and dig further, going over your data until you're positive that it's both accurate and appropriate.

True

When utilizing the ___________ appraisal form (Fannie Mae Form 1004, Freddie Mac Form 70, dated March 2005) you are asked to provide your data source(s) and verification source(s) on two lines in the sales grid on page ___.

URAR, 3

Appraisers must identify the ________________ of the __________'s market area, in order to locate appropriate comparables. Basically, you look for observable changes in land use, demographics, or socioeconomic characteristics.

boundaries, subject

As you are _________________ data, you will simultaneously be ________________ that it is _____________. Do this by double-checking facts, getting second opinions, talking with neighbors, and asking questions whenever facts seem a little funny.

collecting, checking, reliable,

All of these examples could impact the sale price and make it unsuitable as a _____________________. ---Maybe the seller was transferred to another state, and needed to sell the home in a hurry. Or perhaps a divorce forced a hasty sale. ---Maybe the buyer had to purchase by a certain deadline in order to take advantage of tax incentives. ---Or parents sold their property to help their daughter, charging a ridiculously low figure and requiring no down payment. ---Or the sale was done privately, without advertising in the open market. Or the buyer was unaware that the property contained asbestos in the ceiling.

comparable

When using the sales comparison approach, the appraiser makes adjustments to a __________________ sale to show what the comparable ____________ have sold for if it were just like the subject.

comparable, would

The sales ________________ approach: "The process of deriving a value indication for the subject property by comparing sales of similar properties to the property being appraised, identifying appropriate units of comparison, and making adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant when an adequate supply of comparable sales is available."

comparison

The principle of _____________________ is used when determining how _________ to _________ for differences between various ____________________ of a ________________. How much does a fireplace contribute to the overall value of the property? How much does the lack of a swimming pool penalize a property's value in an area where almost everyone has a swimming pool? It is important to note that the value of a particular component of a property is not measured by its cost. A swimming pool might cost $40,000 to install but the market might only ascribe a contributory value of $10,000; or zero. This will depend on many factors such as the location of the property, the climate, the price range of properties in the neighborhood, and perhaps the age of properties in the neighborhood.

contribution, much, adjust, components, property

The reason to ________________ data to units of _________________ is to _______________ the process and make it more __________________ and ____________ to understand. One benefit is that once we _____________ meaningful units of comparison, it ________________ the necessity to make an ________________ for differences in size.

convert, comparison, facilitate, meaningful, easier, chose, eliminates, adjustment

The __________ and final step in the sales _________________ approach process is to reconcile the __________ indications. Because the market is not perfect and we are not usually able to collect all the pertinent data, the indications of value from various sources will generally vary. If we use various indicators of value, the results will probably not be exactly the same, but hopefully will form a consistent pattern. The same occurs when using multiple comparable sales to obtain indications of value for the subject property. It usually only happens in textbooks or classroom examples that the adjusted values of the comparable sales all come out to be the same amount. Therefore, we have to embark on a reconciliation process in which we examine the strengths and weaknesses of our data and come to a reasoned conclusion as to the indicated value for the subject property. Of course, a final reconciliation is required, too, if one or more other approaches to value are utilized. Then we have to reconcile the validity of the sales comparison approach with the conclusions of the other approach or approaches, as part of the overall appraisal process. We will cover the reconciliation process in some depth later in this course.

fifth, comparison, value

When using the sales comparison approach, You _______ start with the sale price of the comparable. Then you add or subtract for differences between the comparable and the subject (like an extra bathroom, nice deck, new roof, swimming pool, etc.). The resulting figure will give you the indicated value of your subject. When determining whether to make a positive or negative adjustment, it is helpful to think of the subject property as a base, which doesn't move. Then think of the comparable property as either above the subject (superior) or below the subject (inferior). You want to adjust the comparable to meet the base, so make a positive (upward) or negative (downward) adjustment as necessary. For example, let's say the subject has a one-car garage (base) and the comparable has a two-car garage (superior). Since the comparable is superior (i.e., "above") the subject, we would need to make a negative (downward) adjustment to the comparable. So if the comparable sold for $85,000 and we have determined that an extra garage bay is worth $3,000, we would adjust the $85,000 sale price downward by $3,000. The adjusted sale price would be $82,000. By making this adjustment in this example, we are answering this question: what would the comparable property have sold for if it had only a one-car garage like the subject?

first

Our ________ step is to _______________ the _______________ in which the _____________ is _________________ for indications of ____________. Our primary search is for sales of comparable properties that are as similar as possible to the subject property in all aspects, including _________, ______, condition, quality, lot size, functional __________ and amenities.

first, research, market, subject, competing, value, size, age, utility

A neighborhood: "A _____________ of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises." A district: "A _______________________ characterized by ________________________ land use, e.g., apartment, commercial, industrial, agricultural." A market area: "The _____________________ region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area."

group, neighborhood, homogeneous, geographic,

In a market value appraisal, an appraiser must verify that transactions can be considered "arm's-__________", i.e., the transaction was made in an open market over a reasonable amount of time, between unrelated parties, neither of whom was under duress to buy or sell, with typical financing, and both buyer and seller were aware of any defects.

length,

A _____________ ________: "The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area."

market area

The sales comparison approach was originally called the "______________ approach" or the "market ________ approach", however these names were not totally appropriate because all ___________ approaches rely on market data. Some appraisers and instructors may refer to it as the "direct sales comparison approach", but it is most correct and appropriate to refer to this approach simply as the "sales comparison approach."

market, data, three

Determining the buyer's and seller's _________________ in a transaction is a _________ way to ________ data. _______ type of duress, whether on the part of the buyer or seller, can _________ the sales _________ of property.

motivation, good, test, any, impact, price

A ______________________________: "A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises."

neighborhood

In appraising _______-unit properties, generally we can find comparable sales that are similar enough overall so that we can make adjustments for relatively minor differences between the properties and then make one-to-one comparisons of the adjusted prices. When appraising vacant land, for example, it may seem difficult to compare a land sale of $90,000 to another one that sold for $210,000. On the face, they may not appear comparable or competitive in the marketplace. However, after breaking the two sales down as to what they sold for per acre, they may be very similar in price. One may have sold for $35,000 per acre and the other one at $40,000 per acre. The same thought process applies when appraising multi-unit properties. A three-unit property may sell for $120,000 and a four-unit property may sell $160,000. The point is, they both sold for $40,000 per unit.

one

The principle of substitution is used to ___________ practically everything.

price

Value indications derived from the sales comparison approach are most accurate when there are many similar properties nearby (such as in a subdivision), and the properties are bought and sold on a regular basis. The approach does not work well in a very weak market, or when few transactions are available to provide comparable data. Generally, the only limitation is that you need to have a sufficient number of ______________ sales. There are many situations when the sales comparison approach may not be the best way to find an indicated value. Examples would be unusual or special-use properties like historic homes, one-of-a-kind designs, homes that are unusually large or small, or other factors that make comparison difficult. Even when an appraiser does not have a large amount of quality data, the sales comparison approach may be employed to provide a range of value as a test of reasonableness against value indications obtained from using another approach. In other words, even if comparable data is limited in quantity or quality, this approach can be used to double-check the value conclusions from the income capitalization approach or cost approach.

reliable

The_________ _____________________ approach is the most commonly used approach for appraising ___________________ property.

sales comparison, residential

In applying the ____________ comparison approach, the appraiser should employ a systematic approach: 1. Research the market 2. Verify the information 3. Select relevant units of comparison 4. Identify differences and make adjustments 5. Reconcile the value indications

sales,

The __________ comparison approach is defined in the International Valuation Standards (______) Glossary of The Dictionary of Real Estate Appraisal, Fifth Edition as: "A comparative approach to value that considers the sales of similar or substitute properties and related market data and establishes a value estimate by processes involving comparison. In general, a property being valued (a subject property) is compared with sales of similar properties that have been transacted in the open market. Listings and offerings may also be considered. A general way of estimating a value indication for personal property or an ownership interest in personal property, using one or more methods that compare the subject to similar properties or to ownership interests in similar properties. This approach to the valuation of personal property is dependent upon the Valuer's market knowledge and experience as well as recorded data on comparable items."

sales, IVS

With the ____________ comparison approach, the process starts with the comparable, not the subject! We never ____________ the ______________ property.

sales, adjust, subject

Describe the steps of the ___________ comparison approach: In the _________ step, we gather sales data and in the second step we __________ that sales data. In the third step, we ____________ relevant units of comparison. The fourth step is to ____________ the differences and make adjustments. The final step is to ________________ the value indications

sales, first, verify, select, identify, reconcile

The ____________ comparison approach is the most ___________________ and widely _______ approach for _______________ properties. This is because the approach considers the actions of buyers and _____________ in the marketplace, as evidenced by its use of actual sale and/or listing prices for competitive properties. This approach generally does not consider the income that is being produced or can be produced by the property. This approach may _______ be used for _____________________ and industrial properties.

sales, important, used, residential, sellers, also, commercial

Of the three appraisal approaches, the ___________ comparison approach __________ most heavily on the principle of __________________.

sales, relies, substitution

In some cases a market area could contain ______________ neighborhoods, or even the entire state or region. For a very unusual property like a monastery converted into a bed-and-breakfast, it could be an international market, given that few similar properties could be found in the United States.

several

In appraising, the principle of _____________________ basically says, "I won't pay more than $200,000 for your house, because I can buy another one just as good for $200,000." That is the gist of the sales comparison approach. The concept is important for residential appraisal, because although all homes are different, they are also more or less ____________________. So the value of a home tends to be set by the cost of an equally desirable substitute. The concept assumes two important things: (1) that there will be no long delay in acquiring a substitute; and (2) that a buyer will accept a substitute. Maybe you've heard the saying, "You can sell any house at any price if you wait long enough for the right buyer." That just isn't true. Houses that are priced much too high can (and usually do) remain unsold. In my local market, there was a house that was on the market for over 10 years at a ridiculously high asking price. Eventually, the seller reduced the asking price to a reasonable level, and at that time the house finally sold. That is why it's __________________ to consider how long a house has been on the __________________ and its current and prior listing prices when using the sales comparison approach. Similarly, sometimes you'll find that substitute properties lack important features of the subject, making them less desirable to buyers; or vice versa. So appraisers note all significant characteristics of both their subject and ________________________ when using the sales comparison approach. Another way of determining substitution value is to look at the cost of new construction. What would a new house of similar value cost to build - assuming that it could be built in a reasonable amount of time? In this case the refrain is, "I won't pay more than $200,000 for your home, because I can build another one just like it for $200,000." That is the basis for the principle of substitution in the cost approach. By the way, the principle of substitution also is applicable to the valuation of income properties. Here, a buyer might say, "I won't pay more than $200,000 for your income property because I can buy another one with similar income returns and financial benefits for $200,000."

substitution, replaceable, important, market, comparables

In applying the sales comparison approach, the appraiser should employ a _______________ approach: 1. ________________ the market 2. _________ the information 3. __________ relevant units of comparison 4. ______________ differences and make adjustments 5. _____________ the value indications

systematic, Research, Verify, Select, Identify, Reconcile