Terms in this set (48)
Direct comparison approach
valuer develops an opinion of value by analysing closed sales, listening, or pending sales of properties that are similar to the subject property
Sales comparison approach
the process of deriving a value indication for the subject property by comparing similar properties that have recently sold with the property being valued, identifying appropriate units of comparison, and making adjustments to the sale prices (or unit prices, as appropriate) of the comparable properties based on relevant, market-derived elements of comparison. The direct comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant when an adequate supply of comparable sales is available.
the value of property tends to be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time
- dcc is diminished if there are no substitute properties
both the relationship between land and the improvements and the relationship between a property and its environment must be in balance for a property to achieve its optimum market value.
- under/over improvements affect value
a valuer analyses the market area of the subject property to identify all significant external influences
Applicability of DCA
when sufficient data on recent market transactions is available. if no sales are found, the valuer may have to use other approaches to value but only after the valuer is convinced there is actually a market for the property. Essential information on income-producing properties derived through dca is used in the income capitalisation and cost approaches.
Valuers must follow a systematic procedure:
1. research the competitive market for information on properties that are similar to the subject property and that have recently sold, are listed for sale, or are under contract.
2.verify the data obtained is factually accurate and that the transactions reflect arm's length market considerations.
3. select the most relevant units of comparison in the market and develop a comparative analysis for each unit.
-explain and analyse market behaviour
4. look for differences between the comparable sale properties and the subject property using all appropriate elements of comparison.
5. reconcile the various value indications produced from the analysis of comparable to a value bracket and then to a single value indication.
Application of DCA
valuer first gathers data from sales, listings, contracts, offers, and refusals of competitive properties. Sources of this information include public records, multiple listing services, real estate brokers, real estate periodicals, and interviews with the parties involved in market transactions.
When the valuer derives all adjustments from within a limited data set, a single erroneous sale price or figure can cause errors in the adjusted sale prices of all the comparable sales, leading to an erroneous indication of value for the subject property. This sort of situation in which the independence of the sales data is lost is known as inbreeding. Verification of transactional and property data is the best method of preventing inbred adjustments from affecting the conclusions of the DCA.
Another practical technique is developing adjustments amounts from a larger data set. the larger the data set, the greater the probability that the results of the analysis will be affected by small data collection errors
Arm's length transaction
a transaction between unrelated parties under no duress. The common definitions of market value usually set out the criteria for an arm's length sale in detail.
units of comparison
the components into which a property may be divided for purposes of comparison e.g. price per square metre, frontage, cubic metres, room, bed, seat, apartment unit. These units usually facilitate analysis even when the properties are not very comparable.
techniques used to derive quantitative adjustments to comparable sale prices in the direct comparison approach. Quantitative adjustments may be applied to comparable sales prices as percentage or dollar amounts
in the direct comparison approach, the process of accounting for differences between comparable that are not quantified; usually follows quantitative adjustment
adjustments for differences between the subject and the comparable properties expressed in monetary terms, rather than a percentage
adjustments for differences between the subject and comparable properties expressed as a percentage of the sale price (or adjusted sale price); percentage adjustments are often used to reflect changes in market conditions and differences in location
basic elements of comparison that should be considered in sales comparison analysis:
the characteristics and attributes of properties and transactions that cause the prices of real estate to vary; include:
real property rights transferred
conditions of sale
expenditures made after sale
market conditions (time)
economic characteristics (expense ratios, management)
use (zoning, utilities, codes)
non real estate components of value (business value, franchises, trademarks)
Transactional and Property Adjustments
1. Real property rights conveyed
2. Financing terms
3. Conditions of sale
4. Expenditures made immediately after purchase
5. Market Conditions
7. Physical characteristics
8. Economic characteristics
10. Non-realty components of sale
reconciling value indications in DCA
the value evaluates the number and magnitude of adjustments and the importance of individual elements of comparison in the market to judge the relative weight a particular comparable sale should have in the comparative analysis
a general term used to identify the process in which quantitative adjustments and qualitative analysis are applied to comparable sales to derive a value indication in the DCA
Applying quantitative adjustments
involves a through analysis of the comparable sales to identify the elements of comparison that affect the value of the type of property being valued.
Expressed in numerical amounts
- numbers or percentages
- sale prices
After quantitative differences have been identified, qualitative analysis is used to determine which comparable sales are inferior, similar, or superior to the subject property for a specific element of comparison
1. trend analysis
2. relative comparison analysis
3. ranking analysis
Quantitative Adjustments techniques
Several techniques are able to quantify adjustments to the sales prices of comparable saves:
- data analysis techniques such as paired data analysis, grouped data analysis, and secondary data analysis
- statistical analysis, inc. graphic and scenario analysis
- cost-related adjustments (cost to repair, depreciation cost)
- capitalisation in income differences
method used to isolate the effect of individual variables on value by studying the impact of variables on different measures of return
grouped data analysis
paired data analysis
Grouped data analysis
involves grouping the data by an independent variable such as date of sale and calculating equivalent typical values
Paired data analysis
a quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analysed to isolate a single characteristic's effect on value or rent.
the lack of data can make the quantifying the adjustments attributable to all the variables a difficult process. an adjustment derived from a single pair of salsas not necessarily indicative
secondary data analysis
makes use of data that does not directly pertain to the subject or comparable properties. Secondary data describes the general property market and is usually collected by a research organisation or government agency.
form of modelling in which the outcomes of future events are forecasted to test the probability or correlation of alternative outcomes.
- test influence of change
- forefast best, most-likely, and worst case scenarios to test a range of values rather than a single final estimate
Cost analysis/cost-related adjusments
cost analysis, adjustments are based on cost indicators such as depreciated building cost, cost to cure or permit fees. The valuer should provide market support as cost-related adjustments and value are not necessarily synonymous.
quantitative technique used to identify and measure adjustments to the sale prices of comparable properties; techniques include statistical inference and linear and multiple regression analysis
quantitative techniques used to identify and measure adjustments to the sale prices of comparable properties; a variant of statistical analysis in which a valuer interprets graphically displayed data visually or through curve fit analysis. Graphs can also be used to support and exhibit value trends for comparison elements in qualitative analysis
Capitalisation of income differences
used to derive an adjustment when the income loss incurred by a comparable property reflects a specific deficiency in the property. Comparable property may enjoy a competitive advantage, in which case the adjustment to the sale price of the comparable property would reflect the income premium the property has.
- easier to support than other quantifying methods, recognised by investors as a valid method of comparison
a qualitative technique used to identify and measure trends in the sale prices of comparable properties; useful when sales data on highly comparable properties is lacking, but a broad database on properties with less similar characteristics is available. Market sensitivity is investigated by testing various factors that influence sale prices.
- large amount of data is available
relative comparison analysis
a qualitative technique for analysing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior or similar to those of the subject property. Relative comparison analysis is similar to paired data analysis, but quantitative adjustments are not made
a process in which valuer determines a probable range of values for a property by applying qualitative techniques of comparative analysis to a group of comparable sales. The array of comparable may be divided into three groups
1. those superior to the subject
2. those similar to the subject
3. those inferior to the subject
the adjusted sale prices reflected by the sales requiring downward adjustment and those requiring upward adjustment refine the probable range of values for the subject and identify a value bracket in which the final opinion will fall
a qualitative technique for analysing comparable sales; a variant of relative comparison analysis in which comparable sales are ranked in defending or ascending order of desirability and each is analysed to determine its positive relative to the subject
Personal interviews can reveal the opinions of knowledgable individuals participating in the subject's market (e.g. trends in sale prices). Although data gathered through personal interviews is primary data, the opinions of market participants should not be sed as the sole criterion for estimating adjustments or reconciling value ranges if an alternative method that relies on direct evidence of market transactions can be applied
1. real property rights transferred
2. financing terms
3. conditions of sale
4. expenditures made immediately after sale
5. market conditions
1. real property rights transferred
when real property rights are sold, they may be the sole subject of the contract or the contract may include other rights, less than all of the real property rights, or even rights to another property or properties.
2. Financing terms
the transaction price of one property may differ from that of an identical property due to different financing arrangements
- instalment sale contracts
- wraparound loans
3. condition of sale
The definition of market value used in most assignment requires "typical motivations of buyers and sellers" where therein no duress on either part to consummate the sale. An adjustment for conditions of sale usually reflects the motivation of either a buyer or a seller who is under no duress to complete the transaction
A concession is a financial payment, special benefit, or non-real estate item included in the sale contract or rental agreement as an incentive to the sale or lease. Concessions occur when the seller or lessor agrees to pay an inducement or give some credit or property to a buyer or a lessee, who agrees to pay a higher price than the seller or lessor would normally pay in return for the inducement or credit.
- includes personal property
- seller contributes to costs
-seller buys real property form the buyer at an inflated rate
-subsudizes the buyers mortgage
4. expenditures made immediately after purchase
a knowledgeable buyer considers expenditures that will have to be made upon purchase of a property because these costs affect the price the buyer agrees to pay. Some expenditures may include:
costs to cure deferred maintenance
costs to demolish and improve any improvements
costs to petition for a zone change
costs to remediate environment contamination
these costs are often quantified in price negotiations and can be discovered through verification of transaction data .
costs adjusted in DCA for expenditures right after sale to reach its full utility
5. market conditions
comparable sales that occurred under market conditions different from those applicable to the subject on the effective date of value requires adjustment for an differences that affect their values. Adjustment for market condones is made if general property values have increased or decreased since the transaction dates. Market conditions that change over time create the need for adjustment, not time itself.
changes in income tax
fluctuations in supply and demand
location, locational differences
non real estate components of value
quality of construction
include all attributes of a property that directly affect its income (this element of comparison is usually applied to income-producing properties)
quality of management
lease expiration dates
lease provisions such as expense recovery clauses
valuers must take care not to attribute differences in real property rights transferred or changes in market conditions to different economic characteristics
non real estate components of value
chattel, business concerns and other items that do not constitute real property but are included in either the sale price of the comparable property or the ownership interest in the subject property