Week 8 - Sales comparison approach (ch 13,14,15)

Question 1

Direct comparison approach best suited when

Answer 1

Comparable sales available

Question 2

Limitations of direct comparison approach

Answer 2

A lack of sales and the comparability of the avaliable data may weaken the support for the value estimate

Question 3

Explain market residual approach

Answer 3

Land value is EXTRACTED from the sale price of an improved property by deducing the value of the improvement

Used to estimate the land value of improved properties in rural areas and properties in which the improvements contribute little to the total property value

Question 4

Explain allocation method

Answer 4

Not commonly used in reality
Useful when transactional data on comparable sites is NOT available

Land value is inferred from the price range of improved properties in the immediate area if an appropriate allocation ratio can be established in the area

Question 5

Explain direct capitalisation land residual

Answer 5

A valuer determines highest and best use as though vacant

Estimate NOI (net operating income) from market rent and operating expense

Calculate how much of the income is attributable to the building
Subtract this amount from estimate NOI
Apply a market derived land capitalisation rate

Question 6

Explain income approach

Answer 6

Direct capitalisation- ground rent

Question 7

Explain sales comparison method

Answer 7

Basic idea- value of property can be determined by analysing the sale price of similar properties
BECAUSE in a “competitive market” close substitutes sell for similar

no fixed formula or model in valuation

Mostly relies on the presence of actual closed market transactions to provide an indication of value

Land and improvements as well

Question 8

Principles relating to sales comparison approach

Answer 8

Anticipation and change
Supply and demand
Substitutes
Balance
Externalities
h and b use

Question 9

Explain sales comparison and substitution

Answer 9

Basic concept - informed buyer will pay less for similar or Same product
The market value of the property is directly related to sale prices of comparable competitive properties

Sound comparable evidence is essential
Comparable sales are adjusted to account for differences between comparable and the subject
Judgemental * not scientific process

Question 10

Explain selecting comparables

Answer 10

Must be properties that prospective buyers would consider substitutes
Should be “arms length transactions”
-fairly negotiated prices that occurred under “normal” conditions

Similar physical characteristics size, bedrooms, condition
Quality, location property rights, similar transactions, market conditions, financing arrangements, time (preferred to be most recent)

Question 11

When do we use comparable approach

Answer 11

Residential - most suitable for single family residency
Less used in commercial as properties are more often very different ‘similar structural features’ - narrower range

When not to use:
When little or no comparable evidence is available (country)
To value income producing properties

Question 12

Elements of comparison

Answer 12

Physical characteristics- style, size, layout, age, condition

Location - zoning

Time - ideally in same cycle e,g spring

Legal characteristics

Financing terms

Conditions of sale E.g. Private sale, forced sale

Question 13

Methods of comparative approach

Answer 13

Quantitative- technique used to derive quantitative adjustments to comparable sales 
Grouped data analysis
Statistical analysis
Cost analysis 
Capitalisation of income differences

Qualitative - process of accounting for difference between comparable that are not quantified (pg 235)
Ranking analysis
Relative comparison analysis
Trend analysis

Question 14

Adjustment process of comparable approach

Answer 14

If comparable is superior subtract
If comparable is inferior add

Adjust the sales prices to reflect the material difference with the subject property

The “final adjusted price” is their value if their characteristics were as Same as the subjects

Reconcile the comparable properties final adjusted sale prices to determine the value of the subject

Subject property is the ‘standard benchmark

Question 15

Advantages of sale comparison approach

Answer 15

Simple, direct, easy concept and technique for most readers to understand

Best when valuer has highly similar sales date
Requires least adjustment if sufficient data avaliable

All adjustments must be supported by evidence

Question 16

Limitations of sale comparison approach

Answer 16

PIf inadequate data is avaliable it may be impossible to apply
Conditions of comparability (e,g commercial hard)
Quality of information
Lack of transfer
Accuracy depends on ability of appraisers ability to recognise differences and to make the proper adjustments for those differences

Question 17

Define sales comparison approach

Answer 17

The process of deriving a value indication for the subject property by comparing similar properties that have already sold with the property being valued, identifying appropriate units of comparison and making adjustments to the sale price of comparable properties based on relevant market derived elements of comparison