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SALES COMPARISON APPROACH

SALES COMPARISON APPROACH. THE PROCESS IN WHICH THE MARKET ESTIMATE IS DERIVED BY ANALYZING THE MARKET FOR SIMILAR PROPERTIES. A MAJOR PREMISE OF THE SALES COMPARISON APPROACH IS THAT THE MARKET VALUE OF A PROPERTY IS DIRECTLY RELATED TO THE PRICES OF COMPARABLE, COMPETITIVE PROPERTIES.

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SALES COMPARISON APPROACH

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  1. SALES COMPARISON APPROACH • THE PROCESS IN WHICH THE MARKET ESTIMATE IS DERIVED BY ANALYZING THE MARKET FOR SIMILAR PROPERTIES. • A MAJOR PREMISE OF THE SALES COMPARISON APPROACH IS THAT THE MARKET VALUE OF A PROPERTY IS DIRECTLY RELATED TO THE PRICES OF COMPARABLE, COMPETITIVE PROPERTIES. • THE FOCUS IS ON SIMILARITIES AND DIFFERENCES AMONG PROPERTIES AND TRANSACTIONS THAT AFFECT VALUE.

  2. THE SALES COMPARISON APPROACH IS APPLICABLE TO ALL TYPES OF REAL PROPERTY INTEREST WHEN THERE ARE SUFFICIENT RECENT, RELIABLE TRANSACTIONS TO INDICATE VALUE. • TO ENSURE THE RELIABILITY OF VALUE CONCLUSIONS DERIVED BY APPLYING THE SALES COMPARISON APPROACH, THE APPRAISER MUST VERIFY THE MARKET DATA OBTAINED.

  3. PROCEDURE 1) RESEARCH THE MARKET TO OBTAIN INFORMATION ON SALES TRANSACTIONS, LISTINGS, AND OFFERS TO PURCHASE OR SELL PROPERTIES THAT ARE SIMILAR TO THE SUBJECT PROPERTY IN TERMS OF CHARACTERISTICS SUCH AS PROPERTY TYPE, DATE OF SALE, SIZE, LOCATION, AND PRODUCTIVITY. 2) VERIFY THE INFORMATION BY CONFIRMING THAT THE DATA OBTAINED ARE FACTUALLY ACCURATE AND THAT THE TRANSACTIONS REFLECT ARM’S LENGTH MARKET CONSIDERATIONS. VERIFICATION MAY ALSO ELICIT ADDITIONAL INFORMATION ABOUT THE MARKET.

  4. 3) SELECT RELEVANT UNITS OF COMPARISON (E.G., DOLLARS PER ACRE, DOLLARS PER SQ. FOOT) AND DEVELOP A COMPARATIVE ANALYSIS FOR EACH UNIT. 4) COMPARE COMPARABLE SALE PROPERTIES WITH THE SUBJECT PROPERTY USING THE ELEMENTS OF COMPARISON AND ADJUST THE SALE PRICE OF EACH COMPARABLE APPROPRIATELY TO THE SUBJECT PROPERTY OR ELIMINATE THE SALE PROPERTY AS A COMPARABLE. 5) RECONCILE THE VARIOUS VALUE INDICTIONS PRODUCED FROM THE ANALYSIS OF COMPARABLES INTO A SINGLE VALUE INDICATION OR A RANGE OF VALUES.

  5. UNITS OF COMPARISON • EACH SALE PRICE SHOULD BE STATED IN TERMS OF APPROPRIATE UNITS OF COMPARISON. • AGRICULTURAL PROPERTIES GENERALLY ARE COMPARED BY PER ACRE PRICE FOR CROP LAND AND RANGELAND. RANGELAND MAY ALSO BE COMPARED BY ANIMAL UNITS. • RESIDENTIAL PROPERTIES ARE USUALLY COMPARED BY THE PRICE PER SQ FOOT OR GROSS LIVING SPACE. • ADJUSTMENTS FOR ELEMENTS OF COMPARISON CAN BE MADE IN EITHER TOTAL PROPERTY PRICE OR TO THE APPROPRIATE UNIT OF COMPARISON.

  6. ELEMENTS OF COMPARISON • THE CHARACTERISTICS OF PROPERTIES AND TRANSACTIONS THAT CAUSE THE PRICES PAID FOR REAL ESTATE TO VARY. • BASIC ELEMENTS OF COMPARISON: 1) REAL PROPERTY RIGHTS CONVEYED. 2) FINANCING TERMS 3) CONDITIONS OF SALE 4) MARKET CONDITIONS 5) LOCATION 6) PHYSICAL CHARACTERISTICS 7) ECONOMIC CHARACTERISTICS 8) USE

  7. MARKET EVIDENCE SHOULD BE TESTED TO IDENTIFY THE VARIABLE ELEMENTS TO WHICH PROPERTY VALUES ARE SENSITIVE. • ADJUSTMENTS FOR DIFFERENCES ARE MADE TO THE PRICE OF EACH COMPARABLE PROPERTY TO MAKE THE COMPARABLES EQUAL TO THE SUBJECT ON THE EFFECTIVE DATE OF THE VALUE ESTIMATION. SALE [+ OR - ] DIFFERENCES = SUBJECTS VALUE

  8. FINANCING TERMS • IF THE PURCHASER OF A COMPARABLE PROPERTY ASSUMED AN EXISTING LOAN AT A FAVORABLE INTEREST RATE, THE PRICE PAID MAY BE HIGHER THAN IT WOULD HAVE BEEN AT CURRENTLY AVAILABLE INTEREST RATES. • QUESTIONS ABOUT FINANCING: 1) WAS THE SALE FINANCED BY THE SELLER? IF SO, WAS THE INTEREST RATE COMPETITIVE WITH CURRENT RATES? 2) WAS THE DOWN PAYMENT CONSISTENT WITH THE TYPE OF FINANCING USED?

  9. CONDITIONS OF SALE • WAS THE SALE BETWEEN FAMILY MEMBERS OR THE RESULT OF A BANKRUPTCY? • IF SO, THE TRANSACTION SHOULD BE EXAMINED TO DETERMINE IF THE CONDITIONS OF SALE EFFECTED THE PRICE.

  10. MARKET CONDITIONS • MARKET CONDITIONS VARY WITH TIME. • THE MARKET PRICE MAY HAVE REMAINED STABLE, DECREASED, OR INCREASED BETWEEN THE TIME OF THE COMPARABLE SALE AND THE PRESENT TIME. • THE CHANGE IN THE PRICE LEVEL IS USUALLY EXPRESSED IN A RATE (PERCENTAGE) OF CHANGE OVER A TIME INTERVAL - MONTH, YEAR, ETC. • THE RATE MAY REFLECT A COMPOUND CHANGE, AVERAGE CHANGE, OR AGGREGATE CHANGE PER PERIOD.

  11. THE TIME ADJUSTMENT COMBINES TWO FACTORS: 1) THE CHANGE IN THE RELATIVE DESIRABILITY OF THE PROPERTY. 2) THE CHANGE IN THE PURCHASING POWER OF MONEY, INFLATION OR DEFLATION.

  12. LOCATION • WHEN PROPERTIES ARE WITHIN THE SAME GENERAL RURAL REGION, LOCATION DOES NOT USUALLY HAVE A MAJOR IMPACT ON VALUE. • PROXIMITY TO TOWNS, LOCATION ON IMPROVED ROADS, AND DISTANCE TO SOURCES OF FARM SUPPLY PRODUCTS MAY AFFECT THE VALUE DUE TO LOCATION. • LOCATION IS A FACTOR IN HIGHEST AND BEST USE DETERMINATION.

  13. PHYSICAL CHARACTERISTICS • PHYSICAL CHARACTERISTICS ACCOUNT FOR THE MOST EXTENSIVE COMPARISONS AMONG RURAL PROPERTIES. • LAND FEATURES AND IMPROVEMENTS INCLUDE: 1) SOIL TYPE 2) WATER -IRRIGATION AND STOCK WATER 3) TOPOGRAPHY - SLOPE 4) IMPROVEMENTS TO THE LAND SUCH AS TERRACES, WATER WAYS, TAIL WATER PITS, IRRIGATION SYSTEMS, ETC.

  14. SIZE OF THE PROPERTY IS FREQUENTLY A SIGNIFICANT PHYSICAL VARIATION. • BUILDING IMPROVEMENTS ARE CONSIDERED A PHYSICAL CHARACTERISTIC AND REQUIRE ADJUSTMENT.

  15. INCOME (ECONOMIC) CHARACTERISTICS • FOR AGRICULTURAL PROPERTIES THE MAJOR INCOME CHARACTERISTIC IS THE PRODUCTIVITY OF THE LAND AND IS OFTEN CONSIDERED IN THE CHARACTERISTICS.

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