Chapter 12: Sales Comparison Approach

Chapter 12:Sales Comparison Approach

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

Sources of Comparable DataPrimary sources

Buyers and sellersBrokersPublic recordsProfessional data companiesMultiple listing servicesAppraisers

Sources of Comparable DataShould 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

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

Identification of Units of Comparison: Income Units

Potential gross income multiplierDifficult to use if the comparable is rented under different

terms than the subject propertyDifficult to use if the comparable or subject represents a

leased fee interestDifficult to use if efficiency ratios are not in a reasonable

range

Effective gross income multiplierDifficult to use if the comparable is rented under different

terms than the subject propertyDifficult to use if the comparable or subject represents a

different ownership interestCan be used if efficiency ratios are not in a reasonable

range

Identification of Units of Comparison: Income Units

Gross rent multiplierUsed primarily for residential properties

Net income multiplierDifficult to use if the comparable or subject represents a

different ownership interest

Identification of Units of ComparisonFactors should be based on the same units for comparable

and subject property

Differences in factors may be caused byDifferences in ownership interestsNon-cash equivalent sales pricesExcess landPossible differences in lease terms, market condition and

expense treatment in leasesDifferences in occupancy levels

Elements of Comparison Ownership interest

Fee simple Leased fee

Non-market financing

Conditions of sale

Market Conditions

Locational attributesAccess to transportation patternsNeighborhood land use patternExistence of public utilities and facilitiesExistence or lack of support facilities

Elements of Comparison

Physical characteristicsAppearance and designEffective ageConstruction type and qualityConditionSize and finished areaFloor height/ceiling heightEquipmentAmenitiesSite improvements

Economic characteristicsOperating expensesManagementLease terms and concessionsTenant mix

Elements of ComparisonUse

Existing versus highest and best use Intended use

Nonrealty components of valueBusiness valuePersonalty

The Adjustment Process

Percentage adjustmentLocationalPhysical

Dollar adjustmentOwnership interestsCash equivalencyFunctional and economic obsolescence adjustments

Qualitative analysis

Statistical analysis

Sales Comparison Approach ExampleSubject 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

Comparable Office Building Sales

Property Number 1 2 3Date of sale May-02 Oct-01 Dec-02Age 1 year 4 years 3 yearsSales price 2,675,000 4,200,000 1,650,000

Property rights purchased Fee simple Fee simple Leased feeSite area 74,300 sqft 84,000 sqft 35,000 sqftGross building area 26,500 sqft 46,200 sqft 22,300 sqftNet building area 22,200 sqft 40,150 sqft 18,300 sqftPotential gross income $344,000 $592,000 $227,000 Vacancy/credit loss 5% 6% 0%Effective gross income 326,800 556,500 227,000Operating expenses 99,000 172,500 72,000Net operating income 227,800 384,000 155,000Loan amount $2,000,000 $2,750,000 $1,400,000 Interest rate 9.75% 8.75% 9.50%

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.

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.

Ratio Extraction – No Adjustments

Property Number 1 2 3

Price/sqft gross area $100.94 $90.91 $73.99

Price/sqft net area $120.50 $104.61 $95.63

Building efficiency ratio 83.8% 86.9% 82.1%

PGIM 7.78 7.09 7.27

EGIM 8.19 7.55 7.27

Expense ratio 30.30% 31% 31.70%

Expense/sqft gross area $3.75 $3.73 $3.23

Overall rate 0.085 0.091 0.094

Rent/sqft gross area $12.98 $12.81 $10.18

Rent/sqft net area $15.50 $14.75 $12.40

Floor area ratio 41.2% 55.0% 63.7%

Sales Price Adjustment Chart

Property Number 1 2 3

Sales price $2,675,000 $4,200,000 $1,650,000

Property rights appraised 0 0 200,000

Excess land adjustment -200,000 0 0

Financing adjustment 0 -215,000 0

Adjusted price (Fee simple) $2,475,000 $3,985,000 $1,850,000

Potential gross income $344,000 $592,000 $265,350

Vacancy 5% 6% 6%

Effective gross income $326,800 $556,500 $249,429

Operating expenses $99,000 $172,500 $78,000

Net operating income $227,800 $384,000 $171,429

Property 3 receives adjustments for market equivalency of property rights and PGI and income based on the market.

Ratio Extraction – After Adjustment

Property Number 1 2 3

Price/sqft gross area $93.40 $86.26 $82.96

Price/sqft net area $111.49 $99.25 $101.09

Building efficiency ratio 83.8% 86.9% 82.1%

PGIM 7.19 6.73 6.97

EGIM 7.57 7.16 7.42

Expense ratio 30.3% 31.0% 31.3%

Expense/sqft gross area $3.75 $3.73 $3.50

Overall rate 0.092 0.096 0.093

Rent/sqft gross area $12.98 $12.81 $11.08

Rent/sqft net area $15.50 $14.75 $13.50

Floor area ratio 57.2% 55.0% 63.7%

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

Property Number 1 2 3

Price/sqft gross area $93.40 $86.26 $82.96

Market conditions 1.87 3.45 0

Adjusted price/sqft $95.27 $89.71 $82.96

Location 0 0 0

Age 1% 4% 3%

Size 0 2% 0

Quality -5% -5% 5%

Condition 0 0 0

Total Adjustment -4% 1% 8%

Price/sqft $91.46 $90.61 $89.60

Range of Value Indicators for Subject Before Adjustments

  Range % Difference

PGIM 7.09-7.78 9.7%

EGIM 7.27-8.19 12.6%

Overall cap rate 8.5%-9.4% 10.5%

Price/sqft of gross building area $73.99-$100.94 36.4%

Range of Value Indicators for Subject After Adjustments

  Range % Difference

PGIM 6.73-7.19 6.8%

EGIM 7.16-7.57 5.7%

Overall cap rate 9.2%-9.6% 4.3%

Price/sqft of gross building area $89.60-$90.61 1.2%

Pro forma for the subject property

Potential gross income $300,000

Vacancy and credit loss (6%) -$18,000

Effective gross income $282,000

Operating expenses -$82,000

Net operating income $200,000

Valuation using PGIM

PGIM=7.0

Value of subject=$300,000 x 7.0 = $2,100,000

Valuation using EGIM

EGIM=7.5

Value of subject = $282,000 x 7.5 = $2,115,000

Valuation using cap rate

Cap rate = 9.4%

Value of subject = $200,000 / .094 = $2,127,660

Valuation using price per square foot

Price per square foot = $90/sqft

Value of subject = 24,000 sqft x $90/sqft = $2,160,000

Summary of Subject Value Estimates

Method UsedValue

Indication

PGIM $2,100,000

EGIM $2,115,000

Overall cap rate $2,127,660 Price per sqft gross building area $2,160,000