Direct Comparable Sales Evidence –
Valuation by direct comparison of sales is used more often than any other method, particularly for residential properties. It is most reliable for vacant land, especially in new subdivisions and residential properties, for it is based on the analysis of established and known facts. When the subject property and the comparable sales are nearly identical, there is very little adjustment required to determine market value at that time.
If a valuer can locate properties comparable with the property to be valued and which have recently sold under reasonable terms, conditions and circumstances indicative of fair market value, the valuer can use these sales as a basis for the valuation. This is known as direct comparison and is a simple and straightforward valuation method in which the subject property, improved or unimproved (vacant land), is compared with minimal adjustments.
Valuers should be conversant with all relevant sales in the district in which they are operating. Inspections and analysis of such transactions will enable the valuer to compare each sale in detail with the property being valued. These comparable sales provide the basis for an estimate of value on the property in question and reduce the margin of error.
Normal sales at any period indicate the market value. It is the valuer’s task to interpret and follow the market. In order to interpret the market, valuers must analyse as many comparable sales as possible so that all the information available may be applied to the valuation. Through investigation and analysis, valuers acquire the detailed knowledge of sales that will allow them to compare their property with the values disclosed.
System of analysing sales –
- Must be easy to follow
- Must give concise but accurate data
- Must allow for quick references
The valuer may choose to use a preliminary sales and analysis sheet, onto which can be written a number of possible comparable sales. Not all the sales recorded on this sheet may be comparable, but a valuer can save time by collecting all the relevant information and extracting data on the property being valued.
The property we are valuing is known as the ‘subject property’. The analysis of comparable sales is applied to the valuation of the subject property.
Comparable improved sales involve the sale of land plus improvements. In analysing sales the valuer must ensure that the correct proportion is assigned to each which can be a difficult task.
To make a quick assessment, the comparable sale could be dissected into various portions:
- Main buildings
- Garage, shed (outbuildings)
- Paving, fencing, swimming pools etc.
A comparison of sales can be undertaken if –
- The occurrence of a number of sales of land and improvements are identical in way (except for location) with the premises to be valued every way (except for location) with the premise to be valued.
- There are identical prices realized in respect of each such sale.
- All sales are affected at the same date as the date at which the valuation is required.
As these ideal conditions rarely occur, it is necessary that allowances be made for variable factors.
Evaluating land using the direct sales approach –
This approach involves researching other comparable sites that have recently sold or are for sale at the time of the analysis. The more similar the comparables are to the subject site, the fewer the adjustments that need to be made.
Ideally, the properties used for comparison should have –
Similar location –
Similar location is important as median land values vary according to the location. The value influencing location factors, such as proximity to transport, schools, shopping centres, availability of water, sewerage, gas and electricity, need to be similar. Close proximity to the subject site contributes to the credibility of the analysis.
Similar physical features –
The physical features of the comparable site need to be similar to the subject site in order to minimise the adjustments that need to be made. Comparing a steep block of land with a flat block of land would require unreasonably large adjustments to cover higher sight preparation costs and to take into account the associated view from a steeper block.
Similar potential use –
The potential use of the comparable site needs to be similar to the subject site in terms of the zoning and the market demand for the type of property the zoning allows at the time of appraisal.
Another very important consideration is the date of sale. Using a comparable sale that occurred 12 months ago would probably not reflect the current market.
While there is no doubt that sales evidence is the basis of most valuation work, there is little use applying sales to a valuation unless you are certain of their comparability. This can only be established by careful research and analysis.
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 –
1. Research and analyse sales of comparable properties – establish the terms and conditions of the sale, the location, factors affecting market values, the date and the price each comparable property sold for.
2. Comparison of the sales with the subject property.
3. Judgement of the observed differences that affect prices paid for the comparable properties.
4. Estimation of the value of the subject property based on the most comparable sales.
Correlation Process –
While comparing the properties, it will usually become apparent that some comparable properties are more like the subject property than others.
This correlation step gives the valuer the opportunity to assign more weight to the most comparable properties (ie the ones which need to be adjusted the least) and less weight to the others.
It must be stressed that the use of a schedule or table for direct comparison should be used as the individual valuer sees fit, but is recommended.
Comments such as ‘inferior’, comparable’ and ‘superior’ can be inserted and this process helps to formulate the valuation. The use of the table forces valuers to put on paper their thoughts and notions and shows to a reader of the report the thought process behind the valuation.
In more advanced reports you might use terms such as ‘slightly superior land’, ‘very comparable location,’ or ‘vastly inferior improvements’ to further quantify and qualify the comparability.
Market value is best evidenced by comparable sales, as long as the sales meet the criteria of the willing buyer/willing seller theory as expounded in Spencer v The Commonwealth. However, not all sales fall within this theory, and because of this, prices above and below market value can occur (+ or -MV). These sales are known as ‘out of line’ sales.
It is important to be aware of these out-of-line sales as they represent poor sales evidence.
There are a multitude of examples of out-of-line sales, some of which are listed below.
- Mortgagee sales
- Forced sales (e.g. due to job transfer)
- Discount for one-line sales
- Sales to adjoining owner
- Sales to tenant in occupation
- Sales to relatives or related companiesRemember these sales might not be out of line, but if they don’t fit the pattern established by other evidence then they should not be used in your report, although you might record them in your field notes, with a comment as to why you have discarded them.