Chapter 12: Sales Comparison Approach

1. Chapter 12:Sales Comparison Approach

2. The Sales Comparison Approach is Useful When: An active market exists Comparable sale are highly similar to the subject property Data can be readily verified Local market conditions are not changing rapidly Regional or national economic factors are not changing

3. Sources of Comparable Data • Primary sources • Buyers and sellers • Brokers • Public records • Professional data companies • Multiple listing services • Appraisers

4. Sources of Comparable Data Should be reported using same units of comparison Units of comparison used should be those considered important by the typical investor Use market areas considered comparable by the typical investor in that market

5. Identification of Units of Comparison: Physical Units • Price per square foot of gross building area • Difficult to use if the comparable or subject represent different ownership interests • Differences in location and physical characteristics should be adjusted • Price per square foot of net building area • Better to use if building efficiency ratios are not similar • Price per unit • Price per seat • Price per door • Price per boat slip • Price per parking space • Price per hole • Price per lane • Price per lot or pad

6. Identification of Units of Comparison: Income Units • Potential gross income multiplier • Difficult to use if the comparable is rented under different terms than the subject property • Difficult to use if the comparable or subject represents a leased fee interest • Difficult to use if efficiency ratios are not in a reasonable range • Effective gross income multiplier • Difficult to use if the comparable is rented under different terms than the subject property • Difficult to use if the comparable or subject represents a different ownership interest • Can be used if efficiency ratios are not in a reasonable range

7. Identification of Units of Comparison: Income Units • Gross rent multiplier • Used primarily for residential properties • Net income multiplier • Difficult to use if the comparable or subject represents a different ownership interest

8. Identification of Units of Comparison • Factors should be based on the same units for comparable and subject property • Differences in factors may be caused by • Differences in ownership interests • Non-cash equivalent sales prices • Excess land • Possible differences in lease terms, market condition and expense treatment in leases • Differences in occupancy levels

9. Elements of Comparison • Ownership interest • Fee simple • Leased fee • Non-market financing • Conditions of sale • Market Conditions • Locational attributes • Access to transportation patterns • Neighborhood land use pattern • Existence of public utilities and facilities • Existence or lack of support facilities

10. Elements of Comparison • Physical characteristics • Appearance and design • Effective age • Construction type and quality • Condition • Size and finished area • Floor height/ceiling height • Equipment • Amenities • Site improvements • Economic characteristics • Operating expenses • Management • Lease terms and concessions • Tenant mix

11. Elements of Comparison • Use • Existing versus highest and best use • Intended use • Nonrealty components of value • Business value • Personalty

12. The Adjustment Process • Percentage adjustment • Locational • Physical • Dollar adjustment • Ownership interests • Cash equivalency • Functional and economic obsolescence adjustments • Qualitative analysis • Statistical analysis

13. Sales Comparison Approach Example • Subject Property: • Gross building area=24,000 sqft • Net building area=20,000 sqft • Market rent/sqft net=$15.00 • Market expenses/sqft=$4.10 • Market vacancy=6% • Age of building=new • Effective date of Appraisal: January 1, 2003

14. Comparable Office Building Sales Property 1 contains 28,000 sqft or $200,000 of excess land. The market interest rate was 9.75% at date of sale for property 2.

15. Comparable Office Building Sales All three sales have locations similar to the subject. Comparables 1 and 2 have materials of better quality than the subject. Comparable 3 has materials of lower quality than the subject.

16. Ratio Extraction – No Adjustments

17. Sales Price Adjustment Chart Property 3 receives adjustments for market equivalency of property rights and PGI and income based on the market.

18. Ratio Extraction – After Adjustment

19. Adjustment Grid – Making the Comparable Properties Look More Like the Subject Property

20. Range of Value Indicators for Subject Before Adjustments

21. Range of Value Indicators for Subject After Adjustments

22. Pro forma for the subject property

23. Valuation using PGIM PGIM=7.0 Value of subject=$300,000 x 7.0 = $2,100,000

24. Valuation using EGIM EGIM=7.5 Value of subject = $282,000 x 7.5 = $2,115,000

25. Valuation using cap rate Cap rate = 9.4% Value of subject = $200,000 / .094 = $2,127,660

26. Valuation using price per square foot Price per square foot = $90/sqft Value of subject = 24,000 sqft x $90/sqft = $2,160,000

27. Summary of Subject Value Estimates