Sales Comparison Approach

This approach uses a process of comparison with similar properties that have a known sale price to determine a subject property’s market value. This is the most reliable of the three approaches when appraising single-family homes for market value.

The sales comparison approach relies on the value principle of ___, which says that the value of a property is equal to the value of an equivalent substitute property.

Steps when conducting the sales comparison approach:

Categories of Comparison

Analyze comparables’ locational/physical property characteristics and transaction differences. They explain why different prices

Allow the comparison to be standardized. Units may be price per square foot, per apartment unit, per acre, etc.

The appraiser identifies at least three comparables to use, then makes adjustments to the sales price of the comparable properties to estimate the value of the subject property.

To be able to make valid computations of adjustments, the elements of comparison must be applied in this order:

This is often offered by builders for new construction or as seller concessions in resale transactions.

Was it an arm’s length transaction? Were personal items included, or fixtures excluded?

Underwriters assume appraisers understand the local marketplace, and will accept comparables that exceed distance, time, or other guidelines, if the appraiser supports the decision with written, detailed explanation that demonstrates that local expertise.

This includes the site, view, construction quality, amenities, size, etc.

A process in which an appraiser determines a probable range of values for a property by comparing a group of comparable sales to the subject. The appraiser attempts to include both superior and inferior units of comparison such as age, transaction price, etc.

The ___ approach to finding appraised value measures value as a cost of production, including the acquisition of the land and the construction costs. Its reliability depends on valid reproduction cost estimates (i.e., the cost of rebuilding) and appropriate
depreciation estimates.

The cost approach is often used in three circumstances:

The cost approach, site value is based on the opinion of the subject’s _____ , as though the land is vacant.

The ___ reflects the cost to build a functionally equivalent improvement.

The ___ is the cost to build an exact replica of the subject, with the same materials and deficiencies.

The Three Types of Depreciation

___ is a loss in value caused by deterioration in physical condition.

___ is a loss in value caused by defects in design, such as a poor floor plan or atypical or inconvenient sizes/types of rooms. Examples include houses where there are bedrooms on a level without a bath(s), or where the only access to a bedroom is through another bedroom.

___ is a loss in value caused by an undesirable or hazardous influence offsite. Examples are heavily trafficked areas, industrial odors, or airport noise

__ refers to an item that can be repaired or replaced, and where the cost to cure the item is less than or the same as the anticipated increase in the property’s value after the item is cured. This includes items of deferred maintenance such a painting or repair of faucets. The cost to cure should be reasonable and economically feasible.

___ includes items not practical to correct. Examples are a furnace or a roof that hasn’t reached the end of its economic life.

To estimate the cost of improvements, residential appraisers usually follow these steps:

Assumes the land is vacant and bases opinion on highest and best use

The ___ approach estimates the present value of any future benefits of owning a particular property.

The income approach is based on the value principle of ___

dividing the sale price of a comparable property by that property’s monthly or annual gross rent to arrive at a single number, which is your the _

The GRM is then multiplied by the subject property’s anticipated monthly or annual gross rent to arrive at a __

___ is essentially the same as GRM, but it uses all sources of income from the property rather than only rent. The multiplier is found from a comparable property by dividing the sales price by the property’s annual gross income from all sources. You can then apply the multiplier to the subject property’s income to determine value. Larger properties generally have multiple income sources—such as laundry, vending machines, or parking meters—rather than smaller income properties, where rent is often the only source of income.

This method calculates a net operating income (NOI) for a property over the next year, then applies a capitalization rate to that income to derive a market value for the property. The capitalization rate is found by analyzing the sales price and income of comparable properties. The formula to calculate cap rate is R = I ÷ V, where R is the cap rate, V is the property value (the sales price of a comparable), and I is the net operating income. Direct capitalization is generally appropriate for small- to medium-sized properties and those with stable forecast net income.

This method is similar to direct capitalization, but projects farther into the future than one year. It also considers the potential value of the property upon resale. An expected rate of return is applied to income from the entire holding period to find the current property value. Think of it as the total return of the investment expressed in an annual rate. Yield capitalization is most often used for larger properties where the investor wants a value based on long-term holdings, along with the effect of debt repayment and potential resale of the property on the ultimate return on investment.

Divide the sales price of a comparable property by its gross rental income. Use the result on the subject property to determine a value.

Divide the sales price of a comparable property by its total gross income. Use the result on the subject property to determine a value.

Calculate the projected net operating income for a property over the next year, then apply a capitalization rate.

Apply an expected rate of return to income from the entire holding period to find the current property value.