training session #4 the sales comparison approach 8/15/2017 sales...you are to estimate the value of...
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Training Session #4The Sales Comparison Approach
8/15/2017Local Government Services Division
Nevada Department of Taxation
Identify the Appraisal Problem Define Scope of Work Collect and analyze data Select appropriate units of comparison Make reasonable adjustments to the comparables based
on the market* Reconcile this information with the subject Subject property is compared to recently sold comparable
properties
Basic Steps of Sales Comparison Approach
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Best for single family residences or vacant land
Need enough sales Minimal adjustments Current market data Not applicable for ‘one-of-a-
kind’ properties Chartwell Estate in Bel Air -
$350 million listing
When to Use
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• Generally recognized as good appraisal practice
• More objective-Relies less on opinion of appraisers
Supportable: reflects the actions of the marketplace* Shows what buyers/sellers are actually doing
Benefits of Sales Comparison Approach
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Estimates of value are based on transactions in the past; must assume that market behaviors will continue
Requires sufficient data Less reliable when market is volatile
Limitations
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Principle of Substitution
Principle of Supply & Demand
Principle of Contribution
Economic Principles
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A prudent buyer will pay no more for a property than for a comparable property with similar utility
Principle of Substitution
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The interaction of supply and demand factors determines property prices
Principles of Supply & Demand
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Principle of Contribution
Principle of contribution: the value of a component is measured in terms of its contribution to the value of the whole
The cost of a component does not always equal the value
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What's the value of a blue bathroom?
Contributory Value
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What principle determines property prices?A) Principle of SubstitutionB) Principle of Supply & DemandC) Principle of ContributionD) Principle of Anticipation
Quiz Time!
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Identify the property Determine the property rights Define the purpose and intended use of the appraisal (for
property taxation?) Specify the date of appraisal (as of..) Define the type of value (market, taxable, etc.)
The Appraisal Problem
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• HABU- highest and best use based on market Description of subject property
Quality Architectural attractiveness Size/type of structure Amenities Functional Utility Accrued Depreciation
Property Analysis
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DUST*
Desirability – something someone wants Utility- the use to which the property can be put Scarcity- the supply of real estate available Transferability- if you cannot transfer the property, you
have no sale
Elements of Value
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Generally, estimate market value in fee simple Possessory interest- right of possession and use of a
property Water/air/mineral rights Leasehold interest- allows the rights of use & occupancy
to a tenant under lease
Property Rights
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Definition: the most probable price which a property should bring in an open and competitive market assuming that: Both parties are well informed & motivated Willing buyer & seller There are no special concessions or financing (such as a
family discount) A reasonable time is allowed for open exposure on the
market.
Market Value
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Must be sold on the open market Neither party under duress Reasonable time on market Buyer/seller knowledgeable regarding use of property Consideration in cash or equivalent ‘Arms length’ transaction- buyer does not have a direct
relationship w/ seller
Criteria of a Comparative Sale
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How do I know which comp is best??
Will be influenced similarly by: 4 Forces: Physical, Economic, Governmental, Social
Least amount of adjustments Recent
Best Comparable
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Assessor records Deeds Lease records Published news sources Classified ads Real estate brokers/appraisers Attorneys and bankers Direct interview or survey with buyer/seller
Sources for Sales Data
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Questionable Sales
Charitable Sales Governmental agencies Financial Institutions Estate Sales Forced Sales Uncertain title My brother-in-law
Examples?
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Elements of Comparison* Property Rights Conveyed Financing- Cash or Cash equivalent (No special concessions) Conditions of Sale Marketing Conditions (Time) Location Physical Characteristics
The Sales Comparison Approach
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Conditions of Sale Comparable Sales: where buyer and seller are typically
motivated, well-informed and acting in their own best interests
Marketing Conditions (Time) Sale Dates of Comparables Value Affected by Other Recent Market Changes
Sales Comparison MethodElements of Comparison
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Location Same Neighborhood Account for Differences in Location
Physical Characteristics Size Shape Terrain
Sales Comparison MethodElements of Comparison
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The Neighborhood
Definition of Neighborhood
Natural Boundaries Physical Boundaries (Roads,
Rivers, Railroad Lines) Neighborhood Names
Political/Economic Boundaries
Man-made boundaries
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Zoning and Land-Use Restrictions (Police Power*) Public Restrictions Private Restrictions
Availability, Capacity, and Proximity of Utilities Undeveloped land Site
Sales Comparison MethodElements of Comparison
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Comparables should be affected by same factors/trends GRM/GIM*= number of years the property would take
to pay for itself in gross rent Price per square foot(residential) Price per unit (usually commercial) Price per room
Units of Comparison
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Economic Units of Comparison
Gross Rent Multiplier
Typically used with monthly rents Sales price divided by monthly
rent = GRM Monthly rent x GRM= Sales
Price
Gross Income Multiplier
Divide the property value/sales price by gross annual income
Effective Gross Income Multiplier (EGIM) = Sales Price /Effective gross income
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You are given the following. Calculate the GIM Sale Price= $200,000 Gross annual rental income= $20,000
Answer= $200,000/$20,000= 10 GIM=10
GIM Problem
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Quiz Time!
https://www.surveymonkey.com/r/2CHSHQV
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Apply Adjustments to Comparables*
Unit of Comparison =Sales Price ÷ Element of Comparison
Ex. $/square foot, $/acre, $/room, $/unit, etc.
Sales Comparison MethodAdjustment Process
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Paired Sales Analysis
Property A
Sales Price - $120,000
Property Type - SFR
Bedroom – 3
Bathrooms – 2
Garage – 2 car
Property B
Sales Price- $125,000
Property Type - SFR
Bedroom – 3
Bathrooms – 3
Garage – 2 car
What is the contributory value of 1 bathroom?
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Pay attention when making Adjustments Sales Grid Extracting Adjustments – If subject is better, add $ value to
comp Net Adjustments
Sales Comparison Approach
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Adjustment may be made on lump sum or percentage basis
Adjustments are made based on the item’s contributory value to property
Adjustments are usually made for physical characteristics, location or time
Adjustment Process
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Financing Time Location Physical condition Components Acres Animal Units
Typical Adjustments
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Weighting Process Value Range before and After Adjustments Upper limit of Value Lower limit of Value
Sales Grid and Market Data Grid
Sales Comparison MethodReconciliation
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(Now-Then) = %Then
% number of months= monthly adjustment for time
Ex. Now=$150,000, Then= $129,000, 6 months (150000-129000)/129000= 16.28% .1628/6= 2.7%
Time Adjustment
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Time Adjustment Quiz
Quiz Time!
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COMPARATIVE SALES (LUMP-SUM ADJUSTMENTS)CS1
You are to estimate the value of a subject property using the sales comparisons approach. The subject property
has three bedrooms, one bath, an attached double garage, and no fireplace. Heating is forced hot air.
A search reveals that there are five recent sales of houses in the neighborhood similar in age, construction, and
amenities to the subject.
Sale 1 is a four-bedroom, two-bath residence with an attached double garage. It has a large fireplace and hot water
heat. It sold two years ago for $161,250.
Sale 2 is a three-bedroom, one bath residence with an attached single-car garage but no fireplace. Heating is
forced hot air. It sold recently for $155,900.
Sale 3 is a three-bedroom, two-bath residence with an attached double garage and average fireplace. It has hot
water heat. It sold two years ago for $156,750.
Sale 4 is a three-bedroom, two-bath residence with a single-car garage. It has hot water heat and a large fireplace.
In addition there is surplus land included in the sale with an estimated value of $8,200. It recently sold for a total of
$163,300.
Sale 5 is a four-bedroom, two bath residence with an attached double garage. It has hot water and a large
fireplace. The sale price included personal property worth $7,500. It sold one year ago for a total price of
$164,000.
average fireplace $2,000large fireplace $2,400
a single-car garage $4,300
double-car garage $7,250
forced hot air heat $12,250
hot water heat $12,800
four bedrooms $6,000
extra bath $2,500
Sales indicate that prices have increased 5 percent per year for the last five years.
PROBLEM:
Prepare a lump-sum adjustment chart and estimate the value of the subject property.
Excel
CS 1Subject Sale No. 1 Sale No. 2 Sale No. 3 Sale No. 4 Sale No. 5
Sales Price
Sales Date
Time (5%/Year)
Adj Sales Price
Heating
Garage
Bath
Bedroom
Extra Land
FireplaceTotalAdjustmentsAdjusted SalesPrice
Contents
CASE PROBLEM 2
LUMP-SUM ADJUSTMENTS, VALUE ESTIMATEYou are appraising a single-family dwelling. The house is thirty years old and located in a neighborhood of favorable amenities.The dwelling is brick. It has four rooms and a bath on the first floor, four rooms and two baths on the second floor, and one roomand a bath on the third floor. Condition is average, with the original kitchen.
You have found five comparable sales of nearby properties and set up a rating pattern for comparison as follows:
Sale #1 Sale #2 Sale #3 Sale #4 Sale #5
Construction Brick Frame Frame Frame BrickFirst floor rooms 4 4 3 4 4
First floor baths 1 1 1 1 None
Second floor rooms 4 4 4 4 3
Second floor baths 1 2 2 1 2
Room & bath on 3rd floor Yes Yes No Yes No
Remodeled kitchen Yes No Yes No No
Date of sale Current 1 year 3 years 1 year 2 years
Sale Price $180,000 $160,000 $152,000 $152,000 $150,000
Condition Superior Average Average Inferior Average
Lot Equal Equal Equal Inferior Equal
ADJUSTMENTS
You believe current market prices are 5 percent higher than they were last year and two years ago, but 10 percenthigher than three years ago. Brick construction sells for$5,000 more than frame. Sale #1 is $2,200 superior in overall condition; sale #4 is$2,200 inferior In overall condition and another $2,000 inferior as to the lot. The lack of a fourth room on either floor yourate as a $6,000 differential, and a third-floor room and bath as a $6,500 differential. An extra bath is rated as a $3,500differential. A remodeled kitchen is rated as a $6,500 differential.
PROBLEM:Prepare an adjustment chart and estimate the value of the subject property indicated by the above.
CS 2
Subject Sale No. 1 Sale No. 2 Sale No. 3 Sale No. 4 Sale No. 5Sales Price
Sales DateTime (5% or10%/Year)
Adj Sales Price
Construction
Condition
Lot
1st Flr Rooms
2nd Flr Rooms3rd FloorRm/Bath
1st Flr Bath
2nd Flr Bath
KitchenTotalAdjustmentsAdjusted SalesPrice
Contents
Case Problem 3
PERCENTAGE ADJUSTMENTS: INDUSTRIAL PROPERTY
Subject Property:
222 Industrial Street: One-story masonry building, thirteen years old, in fair condition. Concrete slab floor, one restroom. Common
brick on block walls. Flat build- up tar and gravel roof, wood deck. Building area 8,000 square feet including 800 feet of office space.
Lot size 200’ x 300’.
Comparable Sale #1:
307 West Factory Road. One-story masonry building about twenty-three years old, in good condition and same quality and type of
construction as subject property. Location is similar to subject. Building 10,000 square feet including 1,000 square feet of office
space; one restroom. Lot size 200’ x 300’, Date of sale: two years ago for $285,000.
Comparable Sale #2:
414 Industrial Street. One-story masonry building, thirteen years old, fair condition, common brick on block walls, concrete floor,
steel windows, plate glass front; one restroom. Building area 8,000 square feet including 800 square feet of office space. Location is
similar to subject. Lot size 175’ x 300’. Date of sale: one-and-a-half years ago, for $232,400.
CASE PROBLEM 3
PERCENTAGE ADJUSTMENTS: INDUSTRIAL PROPERTY
(continued)
Comparable Sale #3:
317 Railroad Street. One-story masonry building, thirteen years old, poor condition, concrete slab floor. Common brick on
block walls, flat built-up tar and gravel roof, wood deck, one restroom. Building area 12,000 square feet including 1,300
square feet of office space. Lot size 225’ x 300’. Location 3 percent better than subject property. Date of sale: six months
ago, for $350,000.
Make the following assumption about adjustments:
Condition: Good sells 5 percent higher; Poor, sells 5 percent lower Age: 2 percent loss every
ten years
Vacant land prices have not increased in the last two years. All land is valued at $1.00 per
square foot.
In the past three years, depreciated values have increased 0.5 percent (.005) per month.
PROBLEM:
Prepare a comparative sales adjustment chart and estimate the value of the subject property.
CS 3
Land: 0
Bldg: -
-Property: $
Subject Sale No. 1 Sale No. 2 Sale No. 3Sales Price
Land Value
Sale Price: Bldg
SF Bldg Area
Price/SF Bldg
Date Sold
%Time Adj
$ Time Adj
Time Adj /SF
Condition
Age
LocationTotalAdjustmentsAdjusted SalesPrice
Contents
CASE PROBLEM 4
GROSS RENT MULTIPLIERS
In assessing a commercial building, you note the following data:Comparative Sales Gross Annual Income Sale Price
1 $12,000 $100,000
2 $17,000 $150,000
3 $13,000 $110,000
Subject $15,500
The buildings have approximately the same operating pattern and expense ratios, and are similar in condition and location.
PROBLEM:
What is the indicated value of the subject property using the gross rent multiplier?
(Note that as the annual income increases the GRMs also increase.)
CS 4
Sale Comp Sales Price Gross Annual Income Annual GRM
1 $100,000 $12,000
2 $150,000 $17,000
3 $110,000 $13,000
Subject's Gross Annual Income $15,500
Subject's Estimated GRM
Indicated ValueRounded:
Contents
OFFICEBLDG
Date SalePrice GBA NRAGrossRent
Income
Sale Price /SFof
Multiplier Location OtherSale GBA NRA
1 6/01 $550,000 37,500 30,450 $107,184 Comparable Same
2 7/01 $647,000 42,000 33,516 $125,685 Comparable Larger
3 10/01 $250,000 18,500 14,245 $46,400 SlightlySuperior Smaller
SUBJECT 38,500 30,400 $113,525
APARTMENT BLDG
Date SalePrice GBA Number ofUnitsNumberof
Rooms
Sale PricePer
Location Other
SaleGrossRent
Income SFGBA Unit Room GRM
1 7/01 $150,000 6,500 12 42 $24,000 Comparable Same
2 8/01 $300,000 10,500 20 72 $46,000 Comparable Larger
3 10/01 $85,000 4,500 6 24 $14,500 SlightlySuperior Smaller
SUBJECT 10,000 18 67 $40,500
Contents
CS5
HOMEWORK CASE 6
SALES COMPARISON APPROACH (LUMP-SUM)
The subject property is a one-story brick veneer, single-family residence, located on a 100’ x 300’ lot. The house has six rooms, two baths,
and a one-car garage. It is equipped with a standard hot water heater and built-in kitchen, including oven, range top, and exhaust fan. After
inspection it is determined that the location is good and the over-all property condition is excellent.
Comparable sale 1 is a one-story brick veneer, single-family residence, located on a 75’ x 300’ lot. The house has six rooms and two baths
and is equipped with a standard hot water heater and exhaust fan. After inspection it is determined that the location is fair and the over-all
property condition is good. The property sold one month ago for
$146,000.
Comparable sale 2 is a one-story frame, single-family residence, with a two-car garage, located on a 100’ x 300’ lot. The house has six
rooms, one bath, and a full basement and is equipped with a standard hot water heater and built-in kitchen, including oven, range-top, and
exhaust fan. There is a brick fireplace in the den. After inspection it is determined that the location is good and the over-all property condition
is excellent. The property sold last month for $157,500.
Comparable sale 3 is a one-story brick veneer, single-family residence, located on a 125’ x 300’ lot. The house has seven rooms and two
baths and is equipped with a standard hot water heater and exhaust fan. After inspection it is determined that the location and over-all
property conditions are both excellent. The property sold two months ago for $158,000.
HOMEWORK CASE PROBLEM 6
SALES COMPARISON APPROACH (LUMP-SUM)
(continued)
Comparable sale 4 is a one-story brick veneer, single-family residence located on a 100’ x 300’ lot. The house has six rooms
and two baths and has a one-car garage. It is equipped with a standard hot water heater and built-in kitchen, including oven,
range- top, and exhaust fan. After inspection it is determined that the location is good and over- all property condition is
excellent. The property sold three months ago from father to son for $155,000.
After careful analysis of market conditions, the following adjustments are believed to be in order:
Time adjustment:
Lot size:
Location:
Quality:
Size:
Condition:
Equipment:
Basement:
Bath:
Fireplace:
Garage:
5 percent per year (no adjustment for three months or less)
$1,000 for each 25-foot increment of frontage$2,000 per classification (fair, good, excellent)
Brick veneer is $3,500 better than frame
$3,000 per room
$2,500 per classification
Heater and fan are standard; oven and range, add $650
$3,500 for full basement
$3,200 per bath
$2,200 per fireplace
One-car adds $4,500; two-car adds $6,000
PROBLEM:
Prepare an adjustment chart and determine the value of the subject property.
CS 6
Property:
Subject Sale No. 1 Sale No. 2 Sale No. 3 Sale No. 4Sales Price
Time
Lot Size
Location
Quality
Size
Condition
Equipment
Basement
Bath
Fireplace
GarageTotalAdjustments FamilyAdjusted SalesPrice
HOMEWORK CASE PROBLEM 7
SELLING PRICE PER ROOM: GROSS RENT MULTIPLIER
You are appraising an apartment building that contains the following units:
Rooms Units Monthly Market Rent/Unit
3 ½ 20 $675.004 15 $685.004 ½ 12 $710.00
The 4 ½ - room units have two baths.
You have discovered three comparable properties:
Sale 1 sold recently for $1,708,000. At the time of the sale the contract rent for the property was $10.00 per unit per monthless than market rent. The building contains thirty units of 3 ½ , 4, and 4 ½ rooms, similar to the subject property, for a total of118 rooms. The actual rental income was $247,000 at the time of sale.
Sale 2 sold recently for $2,215,200.
No. of
Rooms per Unit
No. of
Units
Monthly Market Rent
per Unit
3 ½
No second bath.
40 $675.00
Sale 3 sold recently for $1,884,400.No. of
Rooms per Unit
No. of
Units
Monthly Market Rent
per
Unit
4 18 $685.005 18 $725.00No second bath in either type.
PROBLEM:
Using both (1) selling price per room and (2) gross rent multiplier, estimate the value of the subject property.