CHAPTER EIGHT SAMPLE APPRAISALS BY COMPARISON
Perhaps the best way to understand the direct sales comparison approach is to use some examples. These examples are purely fictional, but are intended to give an indication of the methods and procedures used and the types of judgments needed from the appraiser.
SAMPLE #1 Subject Property
The subject property is a single-family residence located at 1234 Elm Street in the City of Oz. It is in the middle of a housing tract consisting of other, similar homes.
For the sake of illustration, this sample appraisal will use the adjustment categories listed on the Uniform Residential Appraisal Report, which is known as the URAR. This URAR is a form report which is commonly used by lending institutions and has a wide acceptance throughout the appraisal industry.
Concessions Construction Above Grade Gross Living Area 1,700 Sq.Ft. Basement & Finished None Rooms Below Grade Functional Utility Average attached Pools, Etc. Efficient Items Equip., Remodeling)
Some definitions are in order regarding some of the above terms and abbreviations:
Items listed as "N/A" mean "not applicable."
- When the room count is listed as "6-3-2," it means that there are 6 total rooms in the house, of which 3 are bedrooms. Not included in the total number of rooms are the 2 bathrooms in the house.
- The "FAU" besides the Heating/Cooling category stands for Forced Air Unit.
Comparable Sale #1
Comparable sale #1 sold for $238,000. The characteristics of this property can be summarized as follows:
Sales or FinancingN/A None Concessions Date of Sale/TimeN/A 6 Mos. Design & Appeal Average Equal Construction Gross Living Area Sq.Ft. Sq.Ft. Basement & Finished None None Rooms Below Grade Functional Utility Average Equal Heating/Cooling FAU/No FAU/Yes Garage/Carport 2-car 3-car Porches, Patios None None Pools, Etc. Efficient Items Equip., Remodeling)
Adjustments to Comparable Sale #1
Comparable sale #1 is very similar to the subject property in most regards. However, as has been stated previously, there are always some differences between any two properties. The following analysis considers only those categories which are different.
The subject property is on a lot which measures 50 feet wide by 100 feet deep. (That is the meaning of the notation "50X100.") The comparable sale is on a bigger lot which measures 75 feet wide by 100 feet deep (75X100).
It is almost always true that all other things being equal, a bigger lot is worth more than a smaller lot. It is important to understand, however, that this increase in value will not necessarily be proportionate to the increase in size. In this instance, the comparable sale has a lot which is 50% larger than the subject property. This does not mean that the larger lot is worth 50% more than the smaller lot. If the minimum lot size in this area is 5,000 square feet, for example, this lot of 7,500 square feet cannot be split into two smaller lots. The extra square footage will mean more maintenance and higher property taxes, but does not change the utility of the lot. It can still only be used as a lot for one single-family home.
The appraiser will need to determine the value of this extra space in this particular market. For the sake of this example, suppose that this appraiser is very familiar with this market and knows that additional lot size is worth $1 per square foot. This would call for an adjustment of $2,500. Since this lot is larger and therefore more valuable, the adjustment would be a negative adjustment, meaning that the $2,500 value would be subtracted from the sale price of the comparable sale to make it more like the subject property.
In this example, the subject property is 10 years old, while the comparable sale is 11 years old. The appraiser has to make the determination of whether this difference will be significant in this market. Depending on the original quality of construction, appraisers seldom make adjustments for age if the difference is less than 5 or 10 years. In this case, no adjustment will be made.
Room Count and Gross Living Area
The subject property has 6 total rooms, with 3 bedrooms and 2 bathrooms (room count 6-3-2), while the comparable sale has 7 total rooms, 4 bedrooms and 2 bathrooms (room count 7-4-2). Further, the subject property has 1,700 square feet, while the comparable property has 1,850 square feet. Given the difference in room counts and square footage, it would appear to be a reasonable assumption that the major difference between these two homes is the one extra bedroom in the comparable sale.
There are two separate issues to consider under this heading. One is the room count and the other is the square footage. Suppose that two properties had virtually the same square footage but one home had more bedrooms than the other. The home with the extra bedroom would in all probability be worth somewhat more than the home with fewer bedrooms. Appraisers, therefore, generally make adjustments for extra bedrooms.
Similarly, suppose that two homes had the same number of bedrooms, but one home had appreciably more square footage than the other. If all other factors are equal, the house with the greater square footage would no doubt sell for more than the smaller property. Accordingly, appraisers generally make adjustments for differences in square footage.
In the case of this sample appraisal, the comparable sale has one extra bedroom and 150 more square feet. It would seem that the entire difference in square footage is due to the extra bedroom. (A bed-room that is 10 feet X 15 feet would have 150 square feet.) A natural question arises: should this comparable sale be adjusted for both room count and square footage or would one adjustment be sufficient? The truth is that there is no one correct answer to this question. Some appraisers feel that there should be an adjustment for both, while others feel that adjusting for the square footage would be sufficient. Either way is acceptable. The appraiser should use his or her best judgment.
In the case of this sample appraisal, the appraiser decides to adjust the comparable sale for the square footage, but not specifically for the room count. Since it appears that all of the additional square footage in the comparable sale relates to the extra bedroom, the appraiser feels that the depreciated value of this square footage will be relatively low, and the square footage will add only $30 per square foot to the value of the property. This translates to an adjustment of $4,500 for the extra square footage (150 square feet X $30 per square foot). The appraiser is comfortable that this is a fair estimate of the value of an extra bedroom in this neighborhood. Since the comparable sale is superior to the subject property in this regard, this $4,500 adjustment will be negative. It will be subtracted from the sale price to arrive at an adjusted value.
While both homes have forced air unit (FAU) furnaces, the comparable sale has central air conditioning, while the subject property does not. The appraiser needs to determine whether this air conditioning adds value to the property or not. Much depends on the climate of the area. For example:
- In most areas of California, the presence of central air conditioning will add to the value of the property.
- In the hotter areas of California, such as in Palm Springs or the San Joaquin Valley, having central air conditioning is considered a necessity. Homes which have central air conditioning will hold their value, while homes which lack it will lose value.
- In some areas of California, notably near San Francisco, it seldom gets hot enough to use the air conditioning. In these areas central air conditioning might add little or no value to the property.
In this particular instance, the appraiser uses his or her knowledge of the local marketplace to make the adjustment. It has been the appraiser's experience that in this area central air conditioning adds $2,000 to the value of the property. Since the comparable sale is superior to the subject property in this regard, the appraiser will subtract this $2,000, to make the comparable sale more similar to the subject property.
Notice that this adjustment was made on the basis of how the air conditioning was perceived in this market, not on the basis of the cost to install central air conditioning. It may well be that it would cost at least $5,000 to install air conditioning in one of these homes. That does not mean that the system will add $5,000 to the value of the property. The adjustment may well differ from one area to another, depending upon the reactions of that particular market.
The subject property has a 2-car attached garage, while the comparable sale has a 3-car attached garage. It would certainly be possible to estimate the cost of the extra square footage in the garage and use that figure to make the adjustment. It is better, however, to make the adjustment on the basis of what this bigger garage adds to the value in that particular market. This can be done either by comparison (through matched pair analysis) or through local market knowledge. For the sake of illustration, suppose that this appraiser knows from personal market knowledge that a 3-car garage adds $2,000 to the market value of the property. Since the comparable property is superior to the subject property in this regard (a 3-car garage versus a 2-car garage), the appraiser will subtract this $2,000 from the sale price of the comparable property.
In the case of this comparable sale, the net adjustment comes to -$11,000, as follows:
Gross Living Area - 4,500
The purpose of making all the adjustments to the comparable sale is so that it will more accurately reflect the value of the subject property. Since the net adjustments in this case come to -$11,000, this figure must be subtracted from the sale price. The indicated value is therefore $227,000, as follows:
Less: Adjustments -11,000
Comparable Sale #2
Comparable sale #2 sold for $239,000. The characteristics of this property can be summarized as follows:
Sales or FinancingN/A None Concessions Date of Sale/TimeN/A 3 Mos. Design & Appeal Average Equal
Condition Average Inferior Gross Living Area Sq.Ft.Sq.Ft. Basement & Finished None None Rooms Below Grade Functional Utility Average Equal
Heating/Cooling FAU/No FAU/No Garage/Carport2-car 2-car
Efficient Items Equip., Remodeling)