Student handout module 3 - pricing case study - amended

LREC 2015 Mandatory CE

Course Developer: Cheryl B. Bella, MAI, AI-GRS 1

MODULE 3

CMA and BPO – Pricing Example

58Course Developer: Cheryl B. Bella, MAI, AI-GRS

n What is a CMA?n When is it used?

n Who is the Preparer?n Who is the Client?

n What is the Conclusion?

59

CMA

Course Developer: Cheryl B. Bella, MAI, AI-GRS

What is a CMA? Comparative Market Analysis

When is it used?Typically when listing a property

Who is the Preparer?Real Estate Agent/licensee

Who is the Client?Seller or Buyer you are representing

What is the Conclusion?Probable List Price or Probable Price Range





n What is a BPO?n When is it used?

n Who is the Preparer?n Who is the Client?

n What is the Conclusion?

62

BPO


What is a BPO? Broker’s Price Opinion

When is it used?Upon request by a third party

Who is the Preparer?Real Estate Agent/Licensees

Who is the Client?Third parties such as banks/mortgage

companies, attorneys, etc.What is the conclusion?

Probable Price or Probable Price Range





Appraisal= or ≠

BPO / CMA


Property Price vs. Property Value“not necessarily equal”

n Price - amount a purchaser agrees to pay and seller agrees to accept for a property at a point in time

n Real Estate Agents talk

price

n Subjective

n Value - monetary worthof property to buyer and

seller at a point in time

n Appraisers talk value

n Objective




Financial Institutions require:Market Value Conclusions for Appraisals and Evaluations

n Buyer and Seller are typically motivated;n Both parties are well informed or well advised, and acting

in what they consider their own best interests;n A reasonable time is allowed for exposure in the open

market;n Payment is made in terms of cash in US dollars or in terms

of financial arrangements comparable thereto; andn The price represents the normal consideration for the

property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.


When do banks typically order a BPO?n Pre-foreclosure¨BPOs are ordered to help bank decide

whether to foreclose or not.n Post-foreclosure¨BPOs are ordered to help determine list price

based on property and market conditions.Note: In Louisiana BPO fee should be sent to the brokerage firm, not the licensee


Pricing Case Studyn Let’s use the comparative unit knowledge

to “price” a subject property. n In “residential” BPO, CMA and Appraisal

Analysis, adjustments are done in gross numbers in the forms. Behind the scenes unit value calculations are used to derive the adjustments and support the reasonableness of same.




PRICING CASE STUDY

n Turn to “Pricing Case Study” section of your handout

n Need calculator for simple math!


Pricing Case Study


We’ve found three comparable closed sales – comparable means,

Recent SalesBracket Subject in Size (L.A.)Competitive Market AreaSimilar in AgeSimilar in Quality and Condition




73

ITEM SUBJECT

Property Address123 Subject Street, Best City

Proximity to Subject

Date of Sale n/a

Days on Market

Sale Price n/a

Living Area 2,498 2,432 SF 2,558 SF 2,322 SFPrice /SF of Living Area $126.34 SP/SF $133.41 SP/SF $129.20 SP/SF

Price Adjustments

Concess ions

Property Rights

Location Good Subdivision

Site Typical Interior

View Other houses

Design (Style) Ranch

Quality of Construction Brick w / slab

Age 10-15 years

Quality/Condition Good

Total/BR/Ba 9Tot / 3BR / 2ba

Living Area 2498Basement & Finished Rooms Below Grade n/a

Functional Utility Adequate

Heating/Cooling Central

Energy Eff icient Items Ceiling Fans

Garage/Carport 2 car garage

Porch/patio/deck Porch

Fence/Pool Fence

Other n/a

Fence Fence/Pool Fence

n/a n/a n/a

2 car grg 2 car grg 2 car grg

Porch Porch Porch

Central Central Central

Ceiling Fans Ceiling Fans Ceiling Fans

none none none

Adequate Adequate Adequate

9Tot / 3BR / 2 ba 9Tot / 3BR / 2ba 9Tot / 3BR/ 2.5ba

2432 2558 2322

10-15 yrs. 10-15 yrs. 10-15 yrs.

Good Good Good

Ranch Ranch Ranch

Brick w / slab Brick w/ slab Brick w/ slab

Typical Interior Typical Interior Typical Interior

Other houses Other houses Other houses

Fee Fee Fee

Good S/D Good S/D Best S/D

Description Description Description

seller paid $2,000 to buyer for repairs none none

35 days 46 days 10 days

$307,250 $341,250 $300,000

w ithin one mile w ithin one mile w ithin one mile

1 month ago 6 months ago 3 months ago

COMPETITIVE CLOSED SALESSALE #1 SALE #2 SALE #3

123 1ST STREET, BEST CITY 123 2ND STREET, BEST CITY 123 3RD STREET, BEST CITY


1st step - Concessions:n Must always be reviewed. The goal is to

get to the price paid for the real estate in “as is” condition “as of” the date of sale.

n Concession Examples:¨Money paid to buyer for repairs outside of recorded

price must be deducted¨Other items included in sales price beyond the real

estate must be deducted if they impact the real estate price (e.g. paid more because movables included. If inclusion did not impact price, do not deduct)


75

ITEM SUBJECT



Date of Sale n/a

Days on Market

Sale Price n/a

Living Area 2,498 2,432 SF 2,558 SF 2,322 SF

Price/SF of Living Area $126.34 SP/SF $133.41 SP/SF $131.35 SP/SF

Sale Price n/a

Price Adjustments Description Adj (+/-) Description Adj (+/-) Description Adj (+/-)

Concessions

seller paid $2,000 to buyer f or repairs ($2,000) none $0 none $0

Adjusted SP/SF | SP

within one mile w ithin one mile w ithin one mile

6 months ago 3 months ago1 month ago



10 days

$307,250 $341,250 $305,000

$307,250 $341,250 $305,000

35 days 46 days




Apply Concession Adjustment in sample problemn First – make the concession adjustment n Compute the Adjusted Sales Price for

each comparablen Compute the Adjusted Sales Price/SF for

each comparable


Pause: Complete Step 1

n Class computation time – compute adjusted sales price of each comparable after concessions.


78

ITEM SUBJECT



Date of Sale n/a

Days on Market

Sale Price n/a


Price/SF of Living Area $126.34 SP/SF $133.41 SP/SF $131.35 SP/SFSale Price n/a


Concessions

seller paid $2,000 to buyer for repairs ($2,000) none $0 none $0

Property Rights Fee Fee Fee Fee Fee Fee

Adjusted SP/SF | SP $125.51 $305,250.00 $133.41 $341,250.00 $131.35 $305,000.00

$307,250 $341,250 $305,000






$307,250 $341,250 $305,000




Highlight the rows of Elements of Comparison

that Differ in each comparable


Pause: Complete Step 2

n Class computation time (highlight elements!)

80

Hint: Four items differ – highlight those rows!


Elements of Comparison that differ include:

n Locationn Bath countn Living Arean Pool




82

ITEM SUBJECT




View Other houses



Age 10-15 years


Total/BR/Ba 9 Tot/ 3BR / 2ba

Living Area 2498Basement & Finished Rooms Below Grade n/a



Energy Ef ficient Items Ceiling Fans



Fence/Pool Fence

Other n/a



123 1ST STREET, BEST CITY

123 2ND STREET, BEST CITY

123 3RD STREET, BEST CITY



Brick w / slab Brick w / slab Brick w / slab

Ranch Ranch Ranch

Good Good Good

10-15 yrs. 10-15 yrs. 10-15 yrs.

2432 2558 2322

9 Tot / 3BR /2 ba 9 Tot/ 3BR / 2ba 9 Tot/ 3BR / 2.5ba


none none none

2 car grg



n/a n/a n/a


Porch Porch Porch

2 car grg 2 car grg


GIVEN(adjustments to use in this case study only): n Best Location to Good Location = -$5,000n ½ bath = $500n Pool Adjustment = $30,000 (extraction

demonstrated in an earlier module)n Living Area = not given (must extract)Remember: adjustment are always applied to the comparable to equate it to the subject.


84

ITEM SUBJECT


Location Good Subdivision $5,000 best to goodSite Typical Interior

View Other houses



Age 10-15 years


Total/BR/Ba 9 Tot/ 3BR / 2ba $500 1/2 bathLiving Area 2498Basement & Finished Rooms Below Grade n/a






Fence/Pool Fence $30,000 pool to no poolOther n/a



123 1ST STREET, BEST CITY

123 2ND STREET, BEST CITY

123 3RD STREET, BEST CITY




Ranch Ranch Ranch

Good Good Good

10-15 yrs. 10-15 yrs. 10-15 yrs.

2432 2558 2322

9 Tot / 3BR /2 ba 9 Tot/ 3BR / 2ba 9 Tot/ 3BR / 2.5ba


none none none

2 car grg



Given: adj.

n/a n/a n/a


Porch Porch Porch

2 car grg 2 car grg




Apply the known adjustments in your adjustment grid.

Pause – Fill in grid in Step 3n Class computation time¨ -$5000 Best to Good location¨ $500 ½ bath¨ $30,000 pool


86

ITEM SUBJECT

Adj usted SP/SF | SP $125.51 $305,250.00 $133.41 $341,250.00 $131.35 $305,000.00

Location Good Subdivision Good S/D $0 Good S/D $0 Best S/D ($5,000)

Site Typical Interior Typical Interior $0 Typical Interior $0 Typical Interior $0

View Other houses Other houses $0 Other houses $0 Other houses $0

Design (Style) Ranch Ranch $0 Ranch $0 Ranch $0

Quality of Construction Brick w / slab Brick w / slab $0 Brick w / slab $0 Brick w / slab $0

Age 10-15 years 10-15 yrs. $0 10-15 yrs. $0 10-15 yrs. $0

Quality/Condition Good Good $0 Good $0 Good $0

Total/BR/Ba 9 Tot / 3BR / 2ba 9T/3BR/2 ba $0 9T/3BR/2ba $0 9T/3BR/2.5ba ($500)

Living Area 2498 2432 ? 2558 ? 2322 ?Basement & Finished Rooms Below Grade n/a none $0 none $0 none $0

Functional Utility Adequate Adequate $0 Adequate $0 Adequate $0

Heating/Cooling Central Central $0 Central $0 Central $0

Energy Efficient Items Ceiling Fans Ceiling Fans $0 Ceiling Fans $0 Ceiling Fans $0

Garage/Carport 2 car garage 2 car grg $0 2 car grg $0 2 car grg $0

Porch/patio/deck Porch Porch $0 Porch $0 Porch $0

Fence/Pool Fence Fence $0 Fence/Pool ($30,000) Fence $0

Other n/a n/a $0 n/a $0 n/a $0



Compute your adjusted sales price, net of Living Area adjustmentPause – Compute final line in Step 3n Class computation time





Living Area Adjustment

What is the only remaining element of comparison that differentiates the comparables from the subject?


Where does the living area adjustment come from?

Market Extraction Matched Pairs




Extraction of Living Area (SF) Adjustment

n Compare the adjusted price of Comparable 1 and Comparable 2

n We have already adjusted for all major differences (concessions and pool)

n These two comparables are now equal except for living area

n We can now extract a living area adjustment


Compute difference in sales price (Sale 1 – Sale 2)Compute the difference is Living Area (Sale 1 - Sale 2)Divide Price Difference by Living Area Difference to determine SP/SF of LA adjustment

92

STEPS:


Pause – Compute Step 4

n Class computation time – subtract each row, then divide (SP difference/SF difference)




Extracted Adjustment: ≈$50/SF


A comparison of Sale 1 to Sale 3

produces a similar answer:

95

Approximately $50/SFCourse Developer: Cheryl B. Bella, MAI, AI-GRS

Let’s now apply the adjustment to the salesn Direction of Adjustment: ¨ Sale 1: Comp. is smaller than subject = “+” adj.¨ Sale 2: Comp. is larger than the subject = “-” adj.¨ Sale 3: Comp. is smaller than the subject = “+” adj.




n Take the difference in the subject SF and comparable SF and multiply by $50

n Direction of Adjustment: ¨Sale 1 = (2498-2432)*$50 “+” adjustment¨Sale 2 = (2498-2558)*$50 “-” adjustment¨Sale 3 = (2498-2322)*$50 “+” adjustment


Pause – Complete Step 5

n Class computation time – compute each comparable living area adjustment!


Application of the unit adjustment $50/SF produces the following:

¨Sale 1 = (2498-2432)*$50 = “+” $3,300¨Sale 2 = (2498-2558)*$50 = “-” $3,000¨Sale 3 = (2498-2322)*$50 = “+” $8,800




Let’s complete the adjustment grid, including the SP/LA adjustment!


Compute the adjusted Sales Price of each comparablePause – complete Step 6n Class computation time


102

ITEM SUBJECT


Concessions

seller paid $2,000 to buyer for repairs ($2,000) none $0 none $0

Adjusted SP/SF | SP, a fter concessions $125.51 $305,250 $133.41 $341,250 $131.35 $305,000

Location Good Subdivis ion Good S/D $0 Good S/D $0 Best S/D ($5,000)

Site Typical Interior Typical Inter ior $0 Typical Interior $0 Typical Interior $0


Design (Sty le) Ranch Ranch $0 Ranch $0 Ranch $0

Quality of Construction Brick w / slab Brick w / slab $0 Brick w / s lab $0 Brick w / slab $0



Total/BR/Ba 9Tot/3BR/2ba 9T/3BR/2 ba $0 9Tot/3BR/2ba $0 9T/3BR/2.5ba ($500)

Living Area 2498 2432 $3,300 2558 ($3,000) 2322 $8,800

Basement & Finished Rooms Below Grade n/a none $0 none $0 none $0



Energy Effic ient Items Ceiling Fans Ceiling Fans $0 Ceiling Fans $0 Ceiling Fans $0





Net Total Adjustment 1.08% $3,300 -9.67% ($33,000) 1.08% $3,300

Adjusted Sa les Pr ice of Comparables $126.87 $308,550 $120.50 $308,250 $132.77 $308,300

SALE #2 SALE #3SALE #1




Sales Price Conclusion:

n Sale 1 = $308,550n Sale 2 = $308,250n Sale 3 = $308,300

Logically – price is around ??????


What’s the next step?

n Measure the subject house correctly!


_________________________________________ Course Developer: Cheryl B. Bella, MAI, AI-GRS

MODULE 3 PRICING CASE STUDY

SUBJECT INFORMATION

COMPARABLE SALES:

What is a Comparable?

Recent Sales = < 6 mo.

(similar mkt)

Bracket Subj. Size

Competitive Mkt Area

Similar Quality

Similar Age = 10-15 years

Similar Condition


CONCESSIONS:

Step 1: Adjust for Concessions:

� Concession Examples:

� Money paid to buyer for repairs outside of recorded price must be deducted

� Other items included in sales price beyond the real estate must be deducted if they impact the real

estate price (e.g. paid more because movables included. If inclusion did not impact price, do not

deduct)

In this example, the seller gave the buyer of Sale 1 $2,000 to replace the damaged carpet, however, the price was recorded “as if” repaired. COMPUTE ADJUSTED PRICE, NET OF CONCESSIONS:

Step 2: Identify all elements of comparisons in the Comparables that differ from the Subject.

In this example there are four items that differ. Highlight the lines of the elements that differ. Hint: Square Feet of Living Area is almost always one item. Search for the other three. (Property Address is not an element of comparison).

ITEM SUBJECT

Property Address

123 Subject

Street, Best City



View Other houses



Age 10-15 years


Total/BR/Ba 9 Tot / 3BR / 2ba

Living Area 2498

Basement & Finished

Rooms Below Grade n/a






Fence/Pool Fence

Other n/a

COMPETITIVE CLOSED SALES

SALE#1 SALE#3 SALE#5


123 1ST STREET, BEST

CITY

123 2ND STREET, BEST

CITY

123 3RD STREET, BEST

CITY




Ranch Ranch Ranch

Good Good Good

10-15 yrs. 10-15 yrs. 10-15 yrs.

2432 2558 2322

9 Tot / 3BR / 2 ba 9 Tot / 3BR / 2ba 9 Tot/ 3BR / 2.5ba


none none none



n/a n/a n/a


Porch Porch Porch

2 car grg 2 car grg 2 car grg


Step 3: Adjust the Comparables relative to the Subject for the known elements that differ, excluding living area.

This is saved for last. The following adjustments have been previously extracted from the market: GIVEN:

� Best Location to Good Location = -$5,000 � ½ bath = $500 � Pool Adjustment = $30,000 (extraction demonstrated in an earlier module) � Living Area = not given (must extract)

Remember: adjustment are always applied to the comparable to equate it to the subject. Appropriately fill in each adjustment and compute the Adjusted Sales Price of Comparables, net of “living area” adjustment.

ITEM SUBJECT

Adjusted SP/SF | SP $125.51 $305,250 $133.41 $341,250 $131.35 $305,000

Location Good Subdivision Good S/D $0 Good S/D $0 Best S/D ?







Total/BR/Ba 9Tot/3BR/2ba 9T/3BR/2 ba $0 9T/3BR/2ba $0 9T/3BR/2.5ba ?







Fence/Pool Fence Fence $0 Fence/Pool ? Fence $0


Adjusted Sales Price of Comparables,

excluding L.A. adjustment


SALE #1 SALE #2 SALE #3


Step 4: Extract the Sales Price per Square Foot (SP/SF) of living area adjustment from the comparables. Perform

the extraction by comparing Comparable Sale #1 to Comparable Sale #2 once Step 3 is complete and the adjusted Sale Price reflects matched pairs:

Compute difference in the adjusted “Sales Price” of sales (Sale 1 – Sale 2) Compute the difference is “Living Area” SF (Sale 1 - Sale 2) Divide “Sales Price Difference” by “Living Area Difference” to determine SP/SF of Living Area adjustment

Matched Pairs

SP/SF of LA Adjustment Extraction

Sale 1 Sale 2 Difference

Adjusted SP -

SF -

Divide SP Diff / SF Diff

You can even try the extraction between Sale 1 and Sale 3 and a similar unit value adjustment is supported. Compute difference in the adjusted “Sales Price” of sales (Sale 1 – Sale 3) Compute the difference is “Living Area” SF (Sale 1 - Sale 3) Divide “Sales Price Difference” by “Living Area Difference” to determine SP/SF of Living Area adjustment

Both Support approximately $50/Square Foot of living area as the most reasonable rate to adjust the sale

for variances in square footage of living area.

Step 5: Adjust the Comparables relative to the Subject for the only remaining element that differs = “Living

Area”. Pay attention to the direction of the adjustment. Smaller comparable to larger subject = positive Larger comparable to smaller subject = negative

� Compute Living Area Adjustment: Take Comparable Living Area SF from Subject Living Area SF

Sale 1 = (2498-2432)*$50 = “+” ________ Sale 2 = (2498-2558)*$50 = “-” ________ Sale 3 = (2498-2322)*$50 = “+” ________

ITEM SUBJECT

Living Area 2498 2432 ? 2558 ? 2322 ?



Step 6: Complete the Adjustment Grid and Compute the Adjusted Price for each Comparable Sale.

PROBABLE LIST PRICE: $_______________________

ITEM SUBJECT

Property Address

123 Subject

Street, Best City


Date of Sale n/a

Days on Market

Sale Price n/a



Sale Price n/a


Concessions

seller paid

$2,000 ($2,000) none $0 none $0

Property Rights Fee Fee Fee Fee Fee Fee

Adjusted SP/SF | SP $125.51 $305,250.00 $133.41 $341,250.00 $131.35 $305,000.00








Total/BR/Ba 9Tot/3BR/2ba 9Tot/3BR/2 ba $0 9T/3BR/2ba $0 9T/3BR/2.5ba ($500)

Living Area 2498 2432 ? 2558 ? 2322 ?









Adjusted Sales Price of Comparables

$307,250 $341,250 $305,000

$307,250 $341,250 $305,000








ANSWER SHEET

ITEM SUBJECT

Property Address

123 Subject

Street, Best City


Date of Sale n/a

Days on Market

Sale Price n/a



Sale Price n/a


Concessions

seller paid

$2,000 to

buyer for

repairs ($2,000) none $0 none $0

Adjusted SP/SF | SP, after concessions $125.51 $305,250 $133.41 $341,250 $131.35 $305,000








Total/BR/Ba 9Tot/3BR/2ba 9T/3BR/2 ba $0 9Tot/3BR/2ba $0 9T/3BR/2.5ba ($500)

Living Area 2498 2432 $3,300 2558 ($3,000) 2322 $8,800




Energy Eff icient Items Ceiling Fans Ceiling Fans $0 Ceiling Fans $0 Ceiling Fans $0





Net Total Adjustment 1.08% $3,300 -9.67% ($33,000) 1.08% $3,300

Adjusted Sales Price of Comparables $126.87 $308,550 $120.50 $308,250 $132.77 $308,300

$307,250 $341,250 $305,000

$307,250 $341,250 $305,000







Education

Student handout module 3 - pricing case study - amended