Analyzing Comparable Sales: Units of Comparison

Appraisals express value as the monetary relationship between properties and those who buy, sell or use those properties, as defined by the Uniform Standards of Professional Practice(USPAP). Fundamental to appraisal practice is the idea of comparing the subject of an assignment to other properties. The Sales Comparison Approach is the foundation of appraisal analysis: appraisers apply its techniques not only in that approach but also in the Cost Approach and Income Approach. Competent appraisers recognize the components by which buyers and sellers judge properties and then measure those components relative to a subject property.

Units and Elements of Comparison

After an appraiser collects information about sales of properties similar to the subject, they usually express the sale prices as dollars paid per a specific measurement. Units of comparison are traditionally related to the size or composition of a property. (Occasionally, properties will be compared on a whole-to-whole basis. This practice is only applicable when sale properties are very similar in size, as houses in a newly-constructed subdivision or vacant lots within such a development.)

The appraiser applies the comparison unit that is most often used in the market for the type of property. Typical units are by square foot, acre, square foot of usable area, and square foot of leasable area. Specialized properties are often compared by units depending on their use: a room, theater seat, marina slip, or garage bay. Comparison units may also vary according to local measurement custom, as in per square foot in the United States vs. per square meter in Europe.

When a sale property is composed of a collection of units that are used or leased separately, an appraiser often expresses a unit sale price that recognizes the property’s range of units. For example, the total square footage of an apartment might be divided by the number of apartment units, to describe the apartment’s price per average unit. Another method might be to apply weights or factors to the various units, based on market data.

Before analyzing the sales relative to subject, the appraiser identifies the property elements that influence sale prices, such as location, permitted uses, physical features (overall size, leasable unit size, building components, and condition), real property rights, financing terms, market demand, and income production capability. The appraiser must thoroughly assess subject property’s market to understand which factors will be significant.

Quantitative vs. Qualitative Analysis

To reach a value conclusion for the subject property, the appraiser considers the effect each variable of comparison had relative to the subject property. This analysis can result in the appraiser making adjustments to the comparable sales’ unit prices to suggest a probable range of value for subject. The price modifications can be expressed in monetary terms or by percentage difference. The best basis for each adjustment is by ‘paired sale analysis,’ where the appraiser compares sales that are alike in all but a single feature.

Ideally, adjustment factors are derived from the data an appraiser has collected for a specific appraisal assignment. However, sales data is often not extensive enough to develop multiple reliable adjustment factors. The appraiser may then use adjustment factors developed in other similar tasks. Many appraisers keep files of these proven adjustment factors for such instances. Competent appraisers must be confident that factors developed in other appraisals are relevant to a current assignment.

Sometimes there just isn’t enough comparable sale data—either in a current assignment or from other appraisals—to develop reliable adjustment factors. In those situations, appraisers may rate the comparison elements on a qualitative base, such as ‘better than’ or ‘inferior to.’ This approach can be more credible than applying unsupported numeric adjustment factors. In all cases, though, analysis of comparison elements reflects fact rather than an appraiser’s opinion.

When Sales Data is Limited

Experienced appraisers often work in markets where comparable data are scarce or nonexistent. This data insufficiency can occur when the subject property is rare or constructed for a single, unique purpose. It also arises when market activity has been suppressed for economic reasons: recession, extremely high interest rates, or a minimal number of market participants. In these situations, appraisers may expand their search for comparable data by looking in other physical locations, searching further back in time, or including sale properties that are considerably different from the subject. Therefore, it is imperative that the appraisal report clearly describes both the data limitations and the means taken to obtain adequate data.

Credible Assignment Results

Professional appraisers are obliged to provide appraisals that are complete enough to provide reliable results and reported in sufficient detail for intended users to understand. Appraisers also must recognize intended users’ additional appraisal development and reporting rules. The bottom line in every appraisal assignment is that the appraisal results must be credible and understandable. The professional appraisal analyzes comparable sales by justifiable methods and clearly reports those methods and how they are applied.