Application of direct comparison :
The main steps involved in the direct sales comparison approach are as follows.
Locate the sales – which need to be recent and similar to the subject site in terms of potential use, dimensions, location and physical characteristic. You should gather as much information as you can on the terms and conditions of each sale and the price that each comparable site sold for.
Compare each sale – Once you have gathered as much information as possible on each site, compare your findings to the subject site.
Adjust prices for differences – Adjust the selling price of each comparable sale to reflect any important differences between the site being compared and the subject site.
Estimate the value – Arrive at a value for the subject site that takes into consideration the similarities and adjusts for the differences between it and the compared sites.
The principle of substitution forms the basis of the sales comparison approach. This approach requires the valuer to possess a sound knowledge of the subject property as well as the neighbourhood, city and specific area where it is located.
The steps involved in the sales comparison approach are as follows.
Research and analyse sales of comparable properties – Determine motives of buyers and sellers and establish the terms and conditions of the sale, the location, factors affecting market values, the date and the price each comparable property sold for.
Compare the sales with the subject property – List the desirable features found in the comparable properties but not present in the subject property and list the desirable features found in the subject property that did not feature in the comparable properties.
Judge how the observed differences affect prices paid for the comparable properties – Subtract the estimated dollar value of each missing desirable feature not found in the subject property from the selling price of each comparable, and add the estimated dollar value of desirable features of the subject property to the comparables.
Estimate the value of the subject property – based on the most comparable sales.
Let’s look at an example.
Making adjustments :
Time adjustment –
Comparable sales selected for price analysis under the market approach to value must be adjusted, if necessary, to compensate for the effect of economic forces that influenced the real estate market during the intervai between the date of the index sale and the date of subject property appraisal.
Market prices of real estate are dynamic in character, moving up or down with:
–changes in building supply and demand
–variations in business and estate cycles
–changes in the value of money both as a result of cycles and of dollar inflation or deflation.
The more recent the index sale, the better and more reliable are the market comparison results. Sales which are six months or more old must be analysed in light of current market conditions to determine the price effects, if any, as a result of the passage of time.
The valuer should ask the question: ‘Suppose the comparable sale was for sale today (on the day of the appraisal) – would it bring the same price at which it sold some time ago?’ If the answer is no, price adjustments are called for and the reason for them must be explained the narrative section of the appraisal report.
Land size, features and location –
The land value (if zoned low density- residential) part of the valuation is determined by direct comparison. Residential land is valued on a block basis, that is, a lump sum per block, not on a square metre or a metre frontage run basis.
This is how intending purchasers consider residential lots. For example, they consider this land at $85 000 is superior to another block on the market for $80 000 because of a better view and aspect.
Inexperienced valuers often make the following mistakes when determining
the value of residential land.
They over-emphasise the importance of dimensions and area. The main criterion is whether or not a cottage can be built on the land.
In an area with a large number of vacant blocks of land, a new valuer would tend to grade them in such a way that there is too great a difference between the worst and the best block. Again this is largely because of the factors in the point above.
The valuer does not account for future cost to construct a residence on the site. For example a steep, rocky, timbered site will be more expensive to build on than a level cleared site. Therefore, someone will usually pay more for the level site than the steep site as it will cost them less in the long run when they build the house. Keep in mind though that this is on the presumption that both sites have the same views. If the steep site has better views as it is more elevated then this also needs to be taken into consideration and more adjustments need to be made.
With careful analysis, the valuer can build up a data bank on the effect on value of different factors. Sales evidence is the ultimate criterion of value.
Garage or carport –
A lump sum or rate per square metre ($/m²) value is used when adjusting for a garage or carport. A lump sum range based on direct comparison could be:
–$400 : old weatherboard garage needing paint, with a dirt floor and iron roof
–$2500 : good condition weatherboard/tile; room for workshop and concrete floor
–$5000 : good condition brick/tile; concrete floor, roll-a-door
The main function of a garage is to protect a car from the weather and thieves. If it succeeds in this, even though old and in need of paint and repairs, it has a utility value.
Carports are basically areas for protecting a car from weather. Depending on size, style and construction, their values could range from $1500 to $5000.
A garage under the main roof of a house is usually considered more desirable than a detached garage, and this should be reflected in the valuation.
Yard improvements or landscaping –
Ground improvements include:
–gardens and landscaping
-footpaths and fences
–a clothes hoist and barbecue.
The inexperienced valuer would tend to over-value such improvements if the summation method were used. Their value is kept in proportion by valuing them together as one lump sum with the direct comparison method.
Intending purchasers may not pay a great deal for things such as gardens because:
–the gardens require work and effort to maintain
–the purchaser may not like gardening or this particular garden.
However, in some suburbs you may pay a ‘premium’ for their consideration.
Fences, footpaths and rotary clothes hoists have utility value as long as they serve their function. However, their value is only small compared with the total value of the cottage.
A range of values is used. A typical range of values (say, in Sydney) would be:
–$5000 : poor gardens, old fences, footpaths
–$10 000 : well-maintained gardens and good fences
–$20 000 : large gardens, well-maintained fences and barbecue area
–$40 000 : extensive gardens, fountains, fences, barbecue.
Swimming pools are depreciated because similar factors apply as were mentioned for gardens. Their value is usually well below cost even when new. They have a value to the owner but not always to the purchaser.
The value of a pool can also depend on the area in which the property is located. If the property is in a family area that is known for having very hot weather and it is not near a beach, a pool may be more desirable and people will pay more for it than in an area that is predominantly occupied by retirees.
State of repair and upkeep –
The state of repair and upkeep can readily be assessed by inspecting the exterior of comparable sale properties.
The age of the property must be taken into account and, where the difference between the subject property and a comparable property can be measured in terms of labour and material, the adjustment is the cost of the labour and material (as estimated by the valuer).
Differences that cannot be quantified in terms of labour and materials are usually dealt with as lump sum (estimate) figures.
It must be kept in mind that adjustments were made on the basis of what each comparable property was like on the day it was sold. It is sometimes difficult to determine whether extensive renovations or additions have been carried out after the date of sale-in other words the state of repair changes drastically. If in doubt the sale may have to be disregarded.