the sales comparison approach

1. The Sales Comparison Approach Dr. Curtis F. Lard

2. Sales Comparison Approach (SCA) An appraisal procedure in which the market value established is based on prices paid in actual market transactions and current listings The process of analyzing sales of similar recently sold properties in order to derive an indication of the most probable sales price of the subject property being appraised

3. Economic Principles used by the Sales Comparison Approach Competition Substitution Supply Demand Highest and Best Use

4. Steps in SCA to Valuation Define the Problem�Establish PMV of Subject Property Select Comparable Market Sales Make Adjustments to S.P. Reconcile Value Estimates Estimate Final Value for S.P.

5. Type of Adjustments Lumps Sum (Location, Neighborhood, etc.) Linear Trends (Time) Variable Rates (Size) Percent Factor & Grades (quality and condition)

6. Items Adjusted Location Time Size Quality Improvements Water Minerals Terms

7. Market Characteristics & Why Adjustments are Needed Heterogeneous product Few sales occur Sales are localized �Lumpy� product Large Amounts of cash Inexperienced buyers and sellers Lack of market information Location is VERY important

8. Market Assumptions Sellers will not take less than PMV of Similar Property Buyers will not pay more than PMV of Similar Property.

9. Rules of Thumb Always adjust to the SUBJECT PROPERTY!!! Any �comp� used should have a minimum effect of .1 on the estimate of PMV for the Subject Property No �comp� should have more than .5 weight on PMV of Subject Property These factors help determine weights: # of Adjustments Absolute adjustments

10. Ideal �Comps� Adjoins subject property Same Size Identical in improvements Same access and/or problems Sold yesterday

11. The Sales Comparison Approach Works Where: You can identify market areas You let the market show differences

12. The Sales Comparison Approach Is Commonly Used For: Residences Lots Small businesses Rural lands

13. Lump Sum Example (Location, Neighborhood, etc.)

14. Lump Sum Example Continued:Sales in Neighborhoods in B/CS

15. Linear Trends Example(11% per year) Estate Settlement as of 6-1-2004

16. Linear Trends Example: Adjustments Adjustment for Comp #2: 2 yrs., 3 mos. 1150 ? 1.11 = 1276.50 1276.50 ? 1.11 = 1416.91 1416.91 ? [(3/12)(11%) + 1] = 1455 Adjustment for Comp #3: 3 mos. 1150 ? [(3/12)(11%) + 1] = 1181 Adjustment for Comp #4: 1 yr., 4 mos. 1250 ? 1.11 = 1387.50 1387.50 ? 1.0367 = 1438 Adjustment for Comp #5: 4 mos. 1295 ? 1.0367 = 1342

17. Linear Trends Example: Conclusions PMV of SP = .4 (Comp #1) + .1(Adjusted Comp #2) + .2 (Adjusted Comp #3) + .1(Adjusted Comp #4) + .2(Adjusted Comp #5) .4 (1225) + .1(1455) + .2 (1181) + .1(1438) + .2(1342) Present Market Value of Subject Property = 1285/acre

18. Variable Rates Land Size�Price Increases as Size Decreases

19. Percentage Factor�Grade or Quality If interrelated, there could be a compound effect.

20. Sources of Information Acquainted Persons/Community Members CEA, VoAg Teacher, SCS, ASCS, planners, zone officials, building inspectors Handlers of farm supplies Building contractors, farm equipment dealers, farm co-ops, elevator managers, milk plant, LS Mkg. Persons who sell land or make loans RE brokers or salesmen, FLB officers, INS, PCA, brokers Farm Managers, Appraisers, Ag. Consultant Other sources Water district, irrigation district, COFC, TREC, USDA publications, US Department of Labor, central appraisal districts

21. Problems with the Sales Comparison Approach Not enough data (common problem) Cost of gathering data Quality of data reported Some trends hold over very limited range Ranges are subjective Some relationships are not recognized (industry or courts) New relationships must stand up in court & the cost of proving is expensive

22. Cash Equivalency Analysis Some sellers give buyers more favorable financing terms than the market conditions. When this happens, the appraiser must make the necessary adjustments in the sales price to compensate for this. The trade-off for favorable financing to the buyer is a higher sales price. Therefore, the following procedure can be used to adjust for this enhancement in the sales price.

23. Cash Equivalency Cash Equivalency: An adjustment for differences in financing a property when sold. C.E.V = DPM + PWF (Pt) CEV: Cash Equivalent Value DPM: Down Payment PWF: Present Worth Factor Pt: Annual Payment AFF = Sales Price � CEV

24. Cash Equivalency Example Typical Market Conditions 20% DPM, 30 yrs, @12% interest Sale: 100 Acre tract sold for $100,000; 20% DPM; 30-yr. mortgage @ 9% interest.

25. Cash Equivalency Example CEV = DPM + PWF (Pt) CEV = + ? CEV = $20,000 + $62,724 = $82,724 AFF = $100,000 � $82,724 = $17,276 Example #2: See notes