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Sales Comparison (Market) Approach and its Application to the Residential Market
IVS 105 Valuation Approaches and Methods
Sales Comparison Approach
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• Based on substitution principle
• The buyers outlay of capital will be influenced by the alternative cost to acquire a comparable property
• Benchmark market valuation approach
– Any property currently for sale should tend to sell for a price that is similar to prices paid for highly comparable properties that have recently sold.
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What do the standards say
The market approach provides an indication
of value by comparing the asset with identical or comparable (that is similar) assets for which price information is available.
IVS 105 – paragraph 20.1
When to use
The market approach should be applied and afforded significant weight under the following circumstances:
(a) the subject asset has recently been sold in a transaction appropriate for consideration under the basis of value,
(b) the subject asset or substantially similar assets are actively publicly traded, and/or
(c) there are frequent and/or recent observable transactions in substantially similar assets.
IVS 105 – paragraph 20.2
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When the comparables are not the same as the subject?
When comparable market information does not relate to the exact or substantially the same asset, the valuer must perform a comparative analysis of qualitative and quantitative similarities and differences between the comparable assets and the subject asset. It will often be necessary to make adjustments based on this comparative analysis. Those adjustments must be reasonable and valuers must document the reasons for the adjustments and how they were quantified.
IVS 105 – paragraph 20.5
Sales Comparison Approach
• Requires market observation
• Compare like with like
• Market Value – most probable selling price
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1. 2. 3. 4. 5.
Sales Comparison: Basic Steps
Inspect the subject and record relevant data Search for comparable, bona fide sales Select comparable sales
Analyse and adjust
Estimate value
Sales Comparison Approach
Direct Comparison
Units of Comparison
– Select relevant units of comparison e.g. price per sq meter
Statistical Comparison – Indexing, regression
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Selecting the Comparable Sales
• The Locality
– Same neighborhood? – Define search area
• Open-Market Transactions – Listed in REINZ?
• Date of Sale
– Close to date of valuation
• How Comparable?
– Square meter, # bedrooms, # baths – Design, age, & amenities
• Sales History of Subject
– Three years prior to date of value
Comparable Sales Data
• Transaction Data
– Date of sale
– Sales price and terms
– Legal description
– Personal property included – Motivation of Parties
• Physical Data
– Land: Size, shape, topography, utilities
– Improvements: size & type, quality, condition, special features, any problems
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Comparable Sales Data continued
• Legal Data – Zoning
– Taxes and assessments
– Public and private restrictions • Location
– Comparability
– Detrimental influences • Market Conditions
– General state of the market – Availability of financing
Adjusting Sales
The subject property is compared with a group of similar properties, which are then adjusted to bring them as closely in line with the subject as possible
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Adjusting Sales continued
Comparable 1
superior SUBJECT
-ve (negative adjustment)
+ve (positive adjustment)
Comparable 2
Elements of Comparison
• Terms and Conditions of Sale
• Time of Sale
• Location
• Physical Features
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Comparing and Adjusting Sales
Identify and Compare Sales Characteristics
Make Market-Derived Adjustments that are:
– Reasonable
– Areconsistent
– Explainthe
price differences between the sales & subject
Making Adjustments
• Adjust the Sale to the Subject
• Use Market-Derived Adjustments • Adjust in the Correct Order
–Terms/conditions –Time
–Location –Physical features
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Types of Sales Adjustments
• Lump Sum Dollar
• Percentage
• Units of Comparison
Text book example
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Statistical comparison method
Analyzing and adjusting comparable sales rely on two main methods:
The direct comparison method
• compares the overall desirability of each sold property with
that of the subject, without any adjustments
The elements of comparison method
• compares the sales with reference to the details of four
critical elements:
• the terms and conditions of sale,
• the time of sale
• the location elements
• the physical elements of the properties 20
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Summary continued
• Direct Comparison
• ElementsofComparison
• Statistical Comparison
– Indexing, regression – check method only
Sales Comparison
Ability to judge the size of adjustments improves as:
– the number of comparable sales increase
– the more comparable the sales are to the
– the more recent the sales are
– market conditions are stable
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Weaknesses
• Unreliable when there are few comparables or they are not in the same location
• Details about comparable sales need to be accurate and this is not always possible
• Often pure judgement, opinion and experience required especially in a rapidly changing market
• Over past years valuers have accepted the sales approach as the basis of most valuations
• The Court usually places most weight on the sales approach, with at least one other check method
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Net Rate Analysis
The net rate method is a sales comparison approach that involves breaking down a sale into it’s component parts
The Net Rate Analysis (NRA)
Background
• A long history of practice
• Used by valuers to overcome the problems when applying the replacement cost approach (Jefferies, 1991)
• Using property land values to separate improvement values from sales for comparisons, based on a net rate per square meter of dwelling floor area (“the net rate”)
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The Technique of the NRA
1. Estimate the market land value of each comparable property at the time of sale.
2. Derive dwelling values by deducting estimated market land values and other improvements (such as garage, shed and fencing, etc.) from total property sale prices.
3. Such derived dwelling values are then analysed and compared on “the net rate” basis for comparisons.
4. Choose the net rate for the subject property and calculate the dwelling value of the subject property.
5. Add the dwelling value and other improvements value of the subject property to its estimated market land value to calculate the total property value.
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The Problems of the NRA
• The total property value is decomposed into land and improvements components
• Land is valued in its highest and best use at the time of sale or valuation
• The job of estimating land values for both comparable and subject properties are tedious
• No comparable vacant land sales
The Improved Net Rate Analysis
Using the property’s assessed land value as a proxy to represent the land component in property valuations
Shi,S.(2015). The improved net rate analysis, Journal of Real Estate Research, 37(1), 117-149.
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