Picking up where we left off in Part 1, There’s More to Comps Than Meets the Eye, let’s dive into how an appraiser analyzes the tangible differences among comparable sales, and makes adjustments to develop the subject property's market value.
The concept is to first determine whether the component part of the comparable sale is inferior, superior, or similar to the subject. Then, an adjustment is made to the component part, either upward or downward, based on how the market perceives its contributory value.
If the comparable property’s most recent sale was part of an estate settlement and the sellers wanted to quickly relinquish the asset in a faster than normal marketing time, the property likely undersold; therefore, an upward adjustment is made to the comparable property’s sale price to recognize its below-market sale price.
Or, the subject property has two bathrooms and the comparable sale property has two-and-a-half; the comparable sale property is superior to the subject in terms of bathroom count and a downward adjustment is made to the comparable property’s sale price. The “adjusted” sale prices of the comparable sales then provide a probable range of the subject’s market value, as of a specified date of value.
Sale prices in single-unit residential real estate generally depend on the following individual components: location, lot size, view (residential, commercial, industrial, train tracks, highway, etc.), gross living area (above grade), design (ranch, colonial, contemporary, etc.), quality of construction, year of construction, physical condition, above grade room count (bedrooms, bathrooms), room layout/functionality, basement and finish, heating/cooling, car storage; and other ancillary amenities such as fireplaces, porches/patios/decks/enclosures.
Paired-sales analysis is one widely used technique by appraisers to analyze contributory value of a property’s component parts.
Paired-sales analysis compares two like properties that sold with one significant difference; say for example, gross living area. All else being equal, a residential dwelling with larger gross living area will sell for more than a dwelling with smaller gross living area. Therefore, the difference in sale price indicates the contributory value for gross living area.
The same process is followed for each item of comparison in order to determine their contributory value. Adjustments, which are supported by paired-sales analysis, are then made to the comparable sale prices for their component differences in comparison to the subject.
That is, if an item is superior to the subject, then a downward adjustment is warranted to the comparable property’s sale price. Example: if the comparable sale has four bedrooms and the subject has two bedrooms, a downward adjustment is warranted to the comparable sale price for being superior with respect to number of bedrooms.
Conversely, if the comparable sale has a quarter-acre lot and the subject has a one-acre lot, an upward adjustment is warranted to the comparable sale price for being inferior with respect to lot size.
The final step in sales comparison analysis is reconciliation. The adjusted values of the comparable sales – with a minimum of three comparable sales analyzed – are reconciled into a single market value conclusion for the subject. Each comparable sale is weighed based on its overall comparability.
The sales that warrant the least amount of adjustments are emphasized heavily as subject value indicators. Conversely, the sales that warrant greater adjustments receive less emphasis on the subject’s market value. A final market value conclusion is made as of the effective date of value – the date the property was physically viewed by the appraiser.
Keep in mind, there is no single “right answer” to an appraisal problem. It is highly unlikely that two appraisers will arrive at the same market value conclusion.
The question lies – how credible and well supported is the appraiser’s analysis upon which the market value conclusion is based? Our recommendation is to work with a designated member of the Appraisal Institute, who has the knowledge and experience necessary to ensure proper guidance.
Have an appraisal question? Contact J. Chris Tricomi at Tricomi & Associates by email or by calling 330-394-9999.