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4-6 SALES COMPARISON APPROACH

This is often the most applicable approach in estimating the market value of a single-family one- to four-unit property. This approach relies on:

  • The availability of sales data
  • The volume of transactions
  • The reliability of reporting the transaction data confirmed and developed under this approach

When developing a value indication by the sales comparison approach, always include the assumptions and data from the other approaches on the VC form.

A. DATA REQUIREMENTS

1. Sales Data vs. Comparable Sale

Any transaction in the market is a sale, but not all sales are comparable. Consider the type of transaction and physical characteristics of any sale before considering the sale a comparable.

2. Selection of Comparable Sales for Analysis

Identify the relevant market based on the area in which the property competes and the forces/dynamics that affect the comparable sale properties. This is necessary in relating the sales to the subject. Consider the amount of time that has elapsed between the sale date and the effective date of the appraisal. Sales data should not exceed six months between the date of the appraisal and the sale date of the comparable, and must not exceed twelve months. An explanation is required for sales dates in excess of six months. Consider neighborhood and other external factors that influence property value, including real estate and non-real estate influences. For example, when most of the neighborhood's residents are employed by one major employer who is relocating out of the region, the neighborhood may experience a decline in values. The term "non-real estate influenced", however, must never include racial composition. Consider the quality and quantity of data available for the given assignment. A lack of quality data in a market may force reliance on data in a similar market not necessarily the subject's immediate market area. However, clearly explain and justify any sales from outside the subject's immediate market area

3. Excluded Sales Transactions

When using conventional sales data, the appraiser must be aware of the terms of the sale and adjust the conventional sales price to reflect any unusual terms. For example, there are sales that must be excluded; however, some transactions may be included but adjusted for factors such as below-market financing to provide a cash equivalent sales price.

4. Current Offerings and Listings Analysis

Using these types of sales are discouraged. However, under certain slow market conditions or in markets with rapidly increasing pricing, it may be acceptable to include properties offered for sale. Proceed with caution when analyzing and adjusting these offerings. Recognize the inherent negotiability in price between an offering and a consummated sale. Clearly label these comparables as offering, listing, under agreement, etc., but present them as additional comparable data only.

5. Sales in Escrow

If a bona fide transaction is imminent, sales in escrow are considered to be reliable indications of market pricing. Exercise care in identifying the planned date of closure for the sale and any extraneous circumstances that may impede the closing on the projected date.

6. Distressed Sales

Using distressed sales is strongly discouraged because of the special circumstances surrounding these transactions.

7. Resite Sales

Using Resite sales from a corporate seller at a below market value is strongly discouraged when the purchaser is the Resite company because of the unusual circumstances surrounding these transactions. Both distressed and Resite sales are strongly discouraged because they fail to meet the test of "market value, " particularly item No. 1:"The buyer and seller are typically motivated." However, these sales can exceed normal market transaction and affect market values.

8. Confirmation of Sales and Transaction Information

The appraiser must verify all market and comparable information used in the appraisal process and is accountable for any information presented as "fact" used to develop the subject property's value estimate.'Verification ensures that the information is accurate and meaningful and provides the appraiser with a firm understanding of market motivations and trends. The goal of the verification process is to ensure that only information that accurately reflects current market conditions and trends is presented and that meaningful conclusions can be reached from this information. During the verification process, it is necessary for the appraiser to gain an understanding of the motivations surrounding the sale in order to:

  • Determine if the sale was arm's length and not distressed
  • Understand current market conditions that influence value

Whenever possible, interview a party to the sale to determine the expectations and motivations for purchasing the property. Also, determine whether significant capital expenditures funded by the seller were made shortly after the transaction occurred. if so, determine whether the expenditure needs to be added back into the sale price to reflect the actual conditions surrounding the sale. The appraiser must verify sale information with the buyer, the seller or one of their representatives (broker, lender, lawyer, etc.). If the sale cannot be verified with someone who has first-hand knowledge of the transaction, use public records. However, the appraiser must clearly state how the sale was verified and to what extent. Do not use or rely heavily on any sale that was not verified with an involved party or one of their representatives because concessions have become more common in the market.

B. ADJUSTMENT PROCESS

Other factors that affect the use of comparable sales must be considered. Account for differences between the subject property and each comparable sale. The analysis of sales includes both quantitative and qualitative factors. Remember that the comparable data is adjusted to the subject property. Present these adjustments as dollar amount figures and justify and explain the rationale for all adjustments. This information must be contained in the appraiser file. The sequence of adjustments should follow this format:

  • The sequence of adjustments are part of the URAR. All FHA appraisers should be familiar with the adjustment grid within the URAR. Adjustments are indicated as a dollar amount. If an adjustment is not necessary, the appraiser can either enter "equal" or $0 as the adjustment.
  • An individual line item adjustment should not exceed +/- 10%. The total adjustments to the comparables should not exceed 15% net and 25% gross of the sales price. If adjustment exceeds a parameter, the appraiser must explain why as part of the appraisal report.
  • Adjustments to the sales include:
  • Property Rights Conveyed. Refer to the property right appraised section of this chapter. This adjustment is always the first adjustment made to all sales.
  • Sales or Financing Concessions. Account for and adjust for any special sale or financing terms, including sales concessions, non-market financing terms, points, buy downs, closing terms and swaps/exchanges. The most common scenario involves the seller paying points in the form of settlement help to the buyer. To reflect the amount, adjust the sales price of the comparable sale downwards. Typically this amount will not exceed six percent of the sales price for typical transactions.
  • Condition of Sale. Account for the conditions surrounding the sale, including foreclosure/ distressed sale, purchased by an adjoining owner, sold between family members, auctioned or any unusual factor that could be reflected in the price paid.
  • Market Conditions. Account for changes that have occurred or are occurring from the date of sale of the comparable transaction to the date of appraisal, including appreciation, new development, availability of financing, loan terms, supply and demand.
  • Property Adjustments. These are required if the difference between the sale and the subject is quantifiable and supported by the market.
  • Location - Account for location considerations.
  • Physical Characteristics - Account for physical differences between the comparables and the subject, including condition, view, design/ appeal and quality of construction. These are typically entered as individual categories.
  • Economic Characteristics - Account for economic characteristics between the comparables and the subject, including occupancy, rent level, lease structure or terms.
  • Non-realty items. Non-realty items, such as personal property, may be included in value. These items are deducted from or added to the total consideration to reflect the cash equivalent price paid for the real property only.
  • Other adjustments. Include physical characteristics that can be based on a dollar amount. The quality and quantity of market data should guide the selection of the most applicable method.

1. Support for Adjustments

Adjustments must be supported by the market. The appraiser must use caution in developing adjustments; not all differences between the sale properties and the subject property are recognized as price-influencing factors in the marketplace. Only those factors that are accepted as value-influencing factors warrant adjustments.

2. Explanation of Adjustments

The appraiser must explain why an adjustment was made. If adjustments are made, the appraiser must explain the differences that support the adjustments made to each of the comparables as they relate to the subject property.

  • Report the explanation on the URAR and maintain it in the work papers.

3. Reconciliation of Adjusted Sale Prices

The appraiser must consider the strengths and weaknesses of each of the comparable sales and develop this data into an indication of value by the sales comparison approach.

  • Report the final reconciled value indication by the sales comparison approach on the URAR.

 

4-7 INCOME APPROACH

When the motivations of the buyer and the marketability of the property are based on its income-producing potential, the income approach must be developed. This approach applies when the entire property or one or more of the units is leased, regardless of the rental amount and occupancy. The ability of the property to be attractive to a renter and/or investor supports the development of the income approach. Situations where the income approach applies are presented on the following chart.

Property

Occupancy

Applicability Test

Single-family

Owner-occupied

Market indication of highest and best use as improved (either for rental or for owner-occupancy)

Single-family

Vacant

Market indication of highest and best use as improved (either for rental or for owner-occupancy)

Two-family

One unit is owner- occupied; the other is vacant.

Optional, depending on the availability and reliability of market data

Two-family

One unit is owner-occupied; the other is rented.

Required if the property is located in a neighborhood with other rental properties; otherwise, optional, depending on the availability and reliability of market data

Three-to-four Family

One unit is owner- occupied; other units are rented.

Required

One-to-four Family

Leasehold Estate

Required

One-to-four Family

Leased Fee Estate

Required

A. DATA REQUIREMENTS

The appraiser must choose similar market rentals to compare to the subject property. Consider the transaction and physical characteristics of a rental before considering the rental as comparable.

1. Confirmation Of Leases And Transaction Information

The appraiser must verify all comparable information used in the appraisal process. The appraiser is liable and accountable for any information presented as a "fact" in developing the value estimate. This ensures that the information is accurate and meaningful and provides the appraiser with an understanding of market motivations and trends. The goals of the verification process are to ensure:

  • That only the information that accurately reflects current market conditions and trends is presented
  • That meaningful conclusions can be reached from this information

If possible, interview the lessee or the lessor to determine their expectations and motivation for entering into the lease. Verify lease information with the lessor/lessee or one of their representatives (broker, agent, lawyer, etc.). If this verification is not possible, clearly state how the lease was verified and to what extent. Do not rely heavily on any lease that was not verified with an involved party or one of their representatives.

2. Adjustment Process

The appraiser must consider other factors that affect the use of comparable leases. The appraiser must account for differences between the subject property and the comparable leases to reconcile the actual lease income. This selection of comparable rentals is significant because the gross income multiplier should not be adjusted, only the comparable rental rate. These adjustments are typically presented as percentage or dollar amount figures. The appraiser must be able to justify and explain the rationale behind all adjustments. The sequence of adjustments should follow the same format as that presented in the sales comparison approach section; however, tailor the categories to the comparable rentals.

3. The Income Projection

In developing the projected gross rent for the subject, the appraiser needs to review and analyze the leases in place on the effective date of the appraisal. Also, consider leases that will commence or terminate around the effective date of the appraisal and the impact, if any, on the property. The appraiser must take appropriate steps to ensure that the development of the income approach reflects the actual conditions at the subject property. If the subject is new, consider when the property income will stabilize. Include the justification for any assumption made - lease up time, for example. The income approach is typically based upon the "as stabilized" premises. Support this approach appropriately and clearly state the date when stabilized income will be achieved.

B. DEVELOPMENT OF RATES

The Gross Rent Multiplier (GRM) is the ratio between the sales price of a property and its gross rental income. This method is used to develop indications of a property value. The appraiser must consider the strengths and weaknesses of each comparable rental and develop an estimated multiplier that adequately reflects the income-generating ability of the subject property. This ratio is applied to the estimated income for the subject to conclude an indication of value by the income approach.

4-8 FINAL RECONCILIATION

The final analytical step in the valuation process is to reconcile value indicators. In this step, the appraiser must measure the strengths and weaknesses of each of the applicable approaches performed and develop this data into a single value estimate.

4-9 RECONSIDERATION OF APPRAISED VALUE

The underwriter may request reconsideration of the appraised value when new market data exists that may not have been reflected in the appraisal. The lender can select new comparables and request a reappraisal. This request from the lender must be in writing and maintained in the appraiser's work file. The appraiser must decide whether to use the new comparables and perform the reappraisal. If the comparables were available when the initial appraisal was performed, the lender may not offer pay for the reconsideration.

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