Establishing and Reporting A Value within the Sales Comparison Approach

The principal objective of this article is to help the reader of a commercial real estate appraisal to determine whether or not the sales used and analyzed are applicable to the property being appraised, with adequate documentation to assist with the key elements for their selection and reasoning for all adjustments used in reaching the value estimate.

Presentation of Sales Data
The information should support why the comparables presented are chosen and should address important factors such as market conditions at the time of sale, highest and best use, as well as physical characteristics, such as location, size, frontage, age, condition, etc. Considering current soft market conditions, recent potential comparable sales obtainable for analysis in a particular market may be quite restricted. Besides the sales data provided for analysis in reaching the estimated value, it can be informative to present additional sales data that might have been considered, but was omitted for some specific reason in the final analysis. This is especially appropriate when the purchased properties relied on might not seem to be exactly like the subject in some features, or are not very current. Current listings of equivalent properties available for sale can also help supplement the sales used and support the value estimate even further.  A few additional considerations in presenting the sales data involve:

– Providing a breakdown of the comparable sales search effort carried out, and documentation regarding the dependability of the data presented.

– Refer to data sources used in the research, including commercial listing providers, and discussions with local real estate professionals.

– Discuss the regional market for the subject property and the typical purchaser.

– Discuss the applicable units of comparison typically used in the selection of comparable sales.

– If the quantity of available “quality” sales is limited, discuss the logic in using sale properties with more diverse features.

– If a preceding (or present) purchase involving the subject property is used as a comparable sale, explain how it is applicable to the valuation assignment.

Analyzing the Sales
No matter how much data is available for analysis, the essential attributes of the property and purchase are expected to be presented with an emphasis on those features that are similar and those that are different between the comparables and the subject. Wherever variations are obvious and significant, discussion ought to focus on the reasoning for using the specific sale, and the judgment applied to effectively equate it to the subject property in establishing the value it indicates. Any concern whether or not a specific sale is a “qualified” data point needs to be clearly addressed and resolved in the narrative discussion. Furthermore, it is expected that emphasis of the discussion associated with the analysis to be on the following factors:

Market Conditions on the Sale Date. How should they vary from the ones occurring at the time of valuation? How are these variations taken into account in the analysis?

Sale Conditions. Do the conditions of sale tie in with the requirements necessary for the definition of value considered? If not, what is the reasoning for including the sale, and how is this taken into account in the analysis?

Location. Is the comparable property found in the market that the subject will likely compete? If not, is there an explanation for including the sale and how is this dealt with in the analysis?

Highest and Best Use. Is the highest and best use of the comparable property the equivalent or highly similar to the subject? If unimproved, is the development potential compatible? If there are substantial differences, is there an explanation for including the sale, and in what ways are the differences taken into account in the analysis?

Physical Characteristics. What are the primary physical factors of value for the particular property classification? How comparable is the sale to the subject within these elements, and just how are dissimilarities dealt with in the analysis?

Quantitative v. Qualitative Adjustments. While not typically mandatory, if quantitative adjustments are made in the analysis, how were they extracted? If qualitative adjustments are undertaken, are they reasonable and supported?

Degree of Adjustments. If an adjustment is necessary that is extraordinarily large or comparatively atypical, what is the reasoning used in generating the adjustment and establishing that the sale stays realistically comparable?

Bracketing of Estimated Value. Do the unadjusted and adjusted value indications for the sales bracket the finalized value for the subject? If not, what is the further justification for the estimated value being outside the array of indicators?

While a specified format for exhibiting the data and analysis is not necessary, the important thing in documenting the sales comparison approach is in clearly showing how the comparable data depended upon was appropriate and reasonable, understanding that the analysis carried out results in a convincing and dependable estimate of value for the subject property. In presenting this information, thought should be given to the possibility that the appraisal could be seen by a broad number of people which has a diverse range of real estate and valuation.