Training Session #4 The Sales Comparison Approach 8/15/2017 Sales...You are to estimate the value of a subject property using the sales comparisons approach. The subject property has

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

In Chat Type "?" for question; "&" for go back; "#" to see more math

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


• 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


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


Principle of Substitution

Principle of Supply & Demand

Principle of Contribution

Economic Principles


A prudent buyer will pay no more for a property than for a comparable property with similar utility

Principle of Substitution


The interaction of supply and demand factors determines property prices

Principles of Supply & Demand


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


What's the value of a blue bathroom?

Contributory Value


What principle determines property prices?A) Principle of SubstitutionB) Principle of Supply & DemandC) Principle of ContributionD) Principle of Anticipation

Quiz Time!


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


• 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


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


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


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


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


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


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


Questionable Sales

Charitable Sales Governmental agencies Financial Institutions Estate Sales Forced Sales Uncertain title My brother-in-law

Examples?


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


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


Location Same Neighborhood Account for Differences in Location

Physical Characteristics Size Shape Terrain



The Neighborhood

Definition of Neighborhood

Natural Boundaries Physical Boundaries (Roads,

Rivers, Railroad Lines) Neighborhood Names

Political/Economic Boundaries

Man-made boundaries


Zoning and Land-Use Restrictions (Police Power*) Public Restrictions Private Restrictions

Availability, Capacity, and Proximity of Utilities Undeveloped land Site



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


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


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


Quiz Time!

https://www.surveymonkey.com/r/2CHSHQV


Apply Adjustments to Comparables*

Unit of Comparison =Sales Price ÷ Element of Comparison

Ex. $/square foot, $/acre, $/room, $/unit, etc.

Sales Comparison MethodAdjustment Process


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?


Pay attention when making Adjustments Sales Grid Extracting Adjustments – If subject is better, add $ value to

comp Net Adjustments

Sales Comparison Approach


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


Financing Time Location Physical condition Components Acres Animal Units

Typical Adjustments


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


(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


Time Adjustment Quiz

Quiz Time!


Reconcile Problem

Reconcile Solution

Questions?

The End


Problems


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.

CS 7

Property: $ - if per room

Property: $ - by GRM

Subject Sale No. 1 Sale No. 2 Sale No. 3Sales Price

Annual PGI

GRM

No. Rooms

No. Units

Rooms/Unit

Baths/UnitAnnualPGI/Room

Sale Price/Room

Documents

Training Session #4 The Sales Comparison Approach 8/15/2017 Sales...You are to estimate the value of a subject property using the sales comparisons approach. The subject property has