DCA Adjustments

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the

adjustment

process

under direct

comparison

Direct Comparison Approach

Market value is developed by comparing the

subject to recently sold, similar properties

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APPRAISAL PRINCIPLES

Relationship to Economic Principles

Principle of supply and demand

Shifts in supply and demand factors may cause

shifts in prices of properties in a market area

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Principle of substitution

The price paid for a property will be equal to the

cost of acquiring an equally desirable substitute

under the same market conditions

It sets the upper limit to the direct comparison

approach


Principle of balance

The relationship between a property and its

environment must be in balance to achieve

optimum market value

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Principle of externalities

Market value will be influenced by external

factors within the propertys market area

APPLICABILITY AND

LIMITATIONS

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Applicability and Limitations of DCA

Advantages

Best reflects the actions of buyers and sellers

Easily understood, explainable and defensible

Disadvantages

Must have adequate sales data

Can be difficult comparing between properties

and locations

Data has a shelf-life

Three Easy Steps!

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Begin the Hunt

Search for market transactions

Sales of recent, similar arms length

transactions

The more compsthe better!

Dont give up quality just to get

quantity

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Similar Building Characteristics

Design

Size, floor plan, additives

Construction and Maintenance

Quality of construction

Level of maintenance

Equipment/Fixtures

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Similar Building Characteristics

Age

Effect can be altered through

renovations

Can be affected by location

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Similar Lot Characteristics

Natural Features

Topography, shape, view, etc.

Proximity to Amenities

Shopping, schools, employment, CBD,

transportation routes, etc.

Services, tax levels

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Similar Lot Characteristics

Lot Size

Will determine what kind of building

can be erected

Shape can also affect value

Area vs Depth vs Frontage

Whats important?

6300

sq ft6500

sq ft

Which Lot Is Worth More?

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Site Adjustments

Irregular Shape

Based on the loss of utility of the lot

MAKE ADJUSTMENTS

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Make Adjustments

Identify differences between the

subject and comparables

Adjust the comps to be equivalent

to the subject

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Elements of Comparison

Each difference between the subject and

comps that could affect market value is

identified as an

ELEMENT OF COMPARISON

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Pro

pe

rtyP

rop

erty

Elements of Comparison

1. Real property rights conveyed

2. Financing terms

3. Conditions of sale (motivation)

4. Money spent after purchase

5. Market conditions (time)

6. Location

7. Physical characteristics

8. Economic characteristics

9. Use/Zoning

10. Non-realty components

Order of

these

first five is

mandatory!

Tran

sactio

na

l

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Real Property Rights Conveyed

Easements, leases, restrictive covenants

Refers to bundle of rights being the

same as the subject

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Financing Terms

Price may be affected by a mortgage at

higher- or lower-than-current market

rates

Comps with unusual financing are

typically omitted

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Conditions of Sale (Motivation)

Price may be affected by:

Seller being forced to sell quickly

Buyer being forced to buy quickly

Non arms-length transactions should be

avoided

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Money Spent After Purchase

Price may be lowered to account for

expenditures that the buyer has to make

immediately after the purchase

Note: This only applies to sales where the

buyer knew about this cost in advance

and reduced the offer accordingly

This is not about latent defects

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Market Conditions (Time)

To account for market shifts between sale

dates and the valuation date

Important to know when the contract

was signed, not when the deal closed

Long closing dates can distort the

effect of market conditions on sale

price

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Location

Different neighbourhoods,

corner lots, etc.

Reference to

positive/negative locational

influences

Excessive locational

differences may exclude a

property from comparison

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Physical Characteristics

Site

Size, shape, view, topography, etc.

Improvements

Size, quality, condition, age, amenities,

etc.

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Economic Characteristics

For income-producing properties

Operating expenses

Quality of management

Lease terms

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Use/Zoning

Highest and best use of comps and

subject should be the same

Zoning is especially important in valuing

vacant land

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Non-Realty Components

Chattels, fixtures, equipment, etc.

When non-realty components are

included in sale price of comps

Comp price will be inflated

This adjustment can include tangible and

intangible items

Which Doughnut Shop Will You Buy?

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TYPES OF ADJUSTMENTS

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Two Types of Adjustments

Quantitative adjustments

Dollar or percentage amounts

Use if sufficient information is available

Qualitative adjustments

Non-numerical

Use if sufficient information is not available

Requires considerable appraisal judgment

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QUANTITATIVE ADJUSTMENTS

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Methods

Dollar adjustments

A dollar amount is attached to the

difference between the subject and

the comp

Best suited to physical, motivation,

financial adjustments

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Methods

Percentage adjustments

A percentage amount is attached to

the difference between the subject

and the comp

Best suited to market (time) and

location adjustments

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Dollar Adjustment Method

Example

Houses are valued at $40 per square foot

Subject has 1,000 sq ft

Comp has 1,100 sq ft

Diff = 100 sq ft (1,100 1,000 = 100)

100 sq ft x $40 per sq ft = $4,000

Adjust the comp downward by $4,000

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Percentage Adjustment Method

Example

Bedrooms impact market value by 10% each

Subject has 3 Bedrooms

Comp has 2 Bedrooms

Comp Sale Price = $90,000

1 Bedroom Diff = $9,000 (10% $90,000)

Adjust the comp upward by $9,000

Value = $99,000 ($90,000 + $9,000)

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Assumptions

1. The valuation function is linear

Dollar adjustments have a constant

value

regardless of the magnitude of the

characteristic

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Valuation Function is Linear

1,000 sq ft2,000 sq ft

5,000 sq ft

$40/sq ft

$40/sq ft

$40/sq ft

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Assumptions

1. The valuation function is linear

Percentage adjustments are constant

in percentage terms

but, therefore, not in dollar terms

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Valuation Function is Linear

Bedrooms impact market value by 10% each

$300,000 house

with 3 bedrooms

1 Bedroom = $30,000

$250,000 house

with 3 bedrooms

1 Bedroom = $25,000

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Assumptions

2. All influences on value are

independent of one another

This means that we assume

strongly correlated factors act

independently of each other, and

can be adjusted for separately

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QUALITATIVE ADJUSTMENTS

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Qualitative Methods

Relative comparison analysis

Ranking analysis

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Example of Using Qualitative Adjustments

After all possible QT adjustments have

been made

There is no data available (no similar

comps) to assist in defining location

Subject Comp #1 Comp #2

Adj Sale Price - $185,000 $192,000

Location - Inferior Superior

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Example of Using Quantitative Adjustments

The only conclusion may be

$185,000 $192,000Subject<

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Data Before Discretion

QT analysis should always be used as the

primary adjustment technique

If certain elements of a property can be

defined no further than inferior or

superior . . . .

(No comps are similar to the subject in

a particular element)

Then QL techniques will help define the

top or bottom of a value range

Making Adjustments

Comparable Property Adjustment

When a feature of the

comparable is INFERIOR

to the subject property

ADD to the sale price

of the comparable

When a feature of the

comparable is SUPERIOR

to the subject property

SUBTRACT from the sale price

of the comparable

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DATA ANALYSIS TECHNIQUES

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Data Analysis Techniques

Paired Sales

Statistical Analysis

Cost Analysis

Capitalization of Rent Loss

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Paired Sales

When two properties are equivalent in all

respects but one, the difference in price is

the value of the single difference

between the two properties

Process of determining an adjustment by

analyzing sales isolated with and without

an element affecting value

Paired Sales Example

Sale House Size Sale Date Location Condition Sale Price

1 1,969 September Good Average $222,250

2 2,055 September Poor Good $231,000

3 2,055 July Poor Good $233,000

4 1,969 March Poor Average $223,500

5 1,969 March Good Average $226,900

6 2,055 July Poor Average $230,000

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1 1,969 September Good Average $222,250


5

1

$226,900

September$222,250

March

$4,650

$4,650 / $226,900 = 2.05%

2.05% / 6 mths = 0.34% decrease per mth

6 mths


2 2,055 September Poor Good $231,000

3 2,055 July Poor Good $233,000


3

2

$233,000

September$231,000

July

$2,000

$2,000 / $233,000 = 0.86%

0.86% / 2 mths = 0.43% decrease per mth

2 mths

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Sales 1 and 5 show a 0.34% decrease per

month

Sales 2 and 3 show a 0.43% decrease per

month

A reasonable estimate of a time

adjustment for the market area

would be 0.39% decrease per

month



4 1,969 March Poor Average $223,500


5

4

$226,900

Poor$223,500

Good

$3,400

$3,400 / $223,500 = 1.52%

A good location is 1.52% better than a

poor location

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Subject is a 12-unit

apartment building

located downwind

of a new asphalt

batching plant

Sale A is a vacant

lot adjacent to the

subject, zoned for a

12-unit apartment

building, which sold

for $36,000

Sale B is a vacant

lot on the other side

of town, zoned for a

12-unit apartment

building, which sold

for $48,000

Sale C is a 9-unit

apartment building

in the subjects

neighbourhood,

which sold for

$459,000

Sale D is a 10-unit

apartment building

on the other side of

town, which sold for

$540,000


Prop Type Zoning Neg Infl SP

Subject Apt 12 unit Yes

Sale A VL 12 unit Yes $36,000

Sale B VL 12 unit No $48,000

Sale C Apt 9 unit Yes $459,000

Sale D Apt 10 unit No $540,000

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Sale D (unaffected) $540,000 /10 = $ 54,000 per unit

Sale C $459,000 / 9 = $ 51,000 per unit

Difference $ 3,000 per unit

12 units = $36,000

Sale B (unaffected) $48,000 /12 = $ 4,000 per unit

Sale A $36,000 /12 = $ 3,000 per unit

Difference $ 1,000 per unit

12 units = $12,000

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Property Adjustment $3,000 12 units = $36,000

Less Land Adjustment $1,000 12 units = $12,000

Building Adjustment $2,000 12 units = $24,000

The negative influence affecting the:

subject building = $24,000

subject land = $12,000

Total Location Adjustment = $36,000

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Statistical Analysis

Appraisers should recognize the differences

between statistical processes in the collection of

data and should be able to distinguish between

descriptive and inferential statistics. Without an

understanding of these issues, any use of

statistical calculations is dangerous or ill-

advised.The Appraisal of Real Estate,

Third Canadian Edition,

Appraisal Institute of Canada

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Cost Analysis

Adjustments based on cost indicators

such as cost to cure or depreciated

building costs

Caution cost and market value are often

not synonymous

Only used if the appraiser can show that

cost equals value, or if no market data is

available

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Cost to Cure

Cost to tear out or remove existing

component

+ Cost of correct-replacement component

+ Any costs above and beyond total cost if

included in initial construction

Salvage value (if any)

Cost to cure

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Capitalization of Rent Loss

Analysis of loss in rental income due to

specific elements

Process

1. Calculate lost rent

2. Capitalizelost rent

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Capitalize Lost Rent

Taken from Income Approach

Converts a propertys capacity to generate Future Benefits into an indication of Present Value

V = Value

I = Income

R = Capitalization Rate

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Capitalization of Rent Loss Example

Consider a 4,000 sq. ft. retail establishment in an oversupplied market

In a normal market, net operating income would be $8/sq. ft.

However, since the oversupply began, net operating income has fallen to $6.25/sq. ft.

The overall capitalization rate as indicated by the market is 10%

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Capitalization of Rent Loss Example

Mkt Cap Rate = 10%

Subject Size = 4,000 sq ft

Market Rent = $8.00/sq ft

Actual Rent = $6.25/sq ft

Rent Loss = $1.75/sq ft ($8.00 $6.25)

Total Rent Loss = $7,000 ($1.75 4,000 sq ft)

Locational

Influence = $70,000 ($7,000 10%)

RECONCILIATION

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Rationale

Reconcile the adjusted sale prices into a FINAL ESTIMATE OF VALUE

Your reconciliation should include a

discussion of the strengths & weaknesses

of each comparable and the reliability of

adjustments made

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3 Principal Considerations of Adjustments

in Reconciliation

Total NUMBER of adjustments

Total NET adjustment

Total GROSS adjustment

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Net and Gross

Net Adjustment

Difference between sale price and

adjusted sale price

Gross Adjustment

Total adjustments (ignoring negative

signs)

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Net v. Gross

Example A:

Sale Price $ 200,000

Time + 10,000

Location 5,000

Size 6,000

Adj S/P $199,000

Net Adj = -1,000

Gross Adj= 21,000

Example B:

Sale Price $ 200,000

Time + 2,500

Location 1,000

Size + 1,500

Adj S/P $203,000

Net Adj = 3,000

Gross Adj = 5,000

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20% Rule for Adjustments

Net adjustments to comps should be

LESS THAN 20% of the original sale price

Net adjustments greater than 20%

indicate the comp is too different from

the subject to be useful

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Reliability of Adjustments

Must also determine which adjustments

are most reliable

Remember not to equate cost to value

when using the direct comparison

approach

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Mark LeavensReal Property Administration Program

(416) 4915050, Ext. 6390

[email protected]

Kent PeelSchool of Public and Legal

Administration

(416) 4915050, Ext. 2198

[email protected]

Documents

DCA Adjustments