Direct Capital Value Comparison (Sales Comparison Approach)

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1 1. Introduction: It is the commonly used method and most accurate It is frequently used in the valuation of residential property for sale purpose and rental valuation for commercial properties. Require the comparable properties of : * A similar property * A similar area * A recent transaction * A market need to be stable. The less the comparable with these requirements, the less valid the comparison will be.

2 2. Valuation Process: 7 Steps required: - Identification of the subject property characteristics - Identification and understanding of the transaction conditions - Identification of the immediate relevant submarket - Identification of all recent transaction that have occurred within this relevant submarket. - Selection of best sample of comparable properties - Adjusting prices of observed transactions to take into account the subject property characteristics - Assess market value of the subject property.

3 3. Adjusting Comparable Evidence - No hard and fast rules - Requires a great amount of skill and local knowledge - Factors that increase and /or decrease value are : Increase : Number of room, built-in central heating, good location, modern equipment, lot size (large garden), garage, double glazing, energy efficiency (loft insulation) Decrease : No central heating, poor location, mid-terrace as opposed to end terrace, building failure (rising damp, dry rot), old facilities( lead wiring and plumbing), no garage or off-street parking

4 (Sales Comparison Approach 4. How many comparable: - Depends on uniqueness of the subject property and the homogeneity of the sub- market within which it is located. - Should gather as much relevant evidence of recent transactions as possible.

5 (Sales Comparison Approach 5. Direct Rental Value Comparison - similar approach is necessary - More detail in the investment method

6 (Sales Comparison Approach 6. Formula used: Sales Price of Comparable Property +/- Adjustments = Indicated Value of Subject Property

7 7. Example Direct Capital Value Comparison (Sales Comparison Approach * House A, the subject property, has central air-conditioning and a garage. * A comparable property, House B, sold for $300,000 one month before the time of appraisal. House B, has a garage but no central air-conditioning, which is valued at $5,000. * House C is comparable to the subject and sold recently for $285,000. House C has central air-conditioning but no garage, which is valued at $22,000 * House D, also comparable to the subject property, sold recently for $330,000. It has both a garage and central air-conditioning. House D, however, is located in a better area of a neighborhood than the subject is, because it backs up to a conservation area. The location adjustment is valued at $20,000

8 8. Working out the example: Comparables B C D Sales Price $300,000 $285,000 $330,000 Location ,000 Garage + 22,000 Air-conditioning +5,000 Adjusted sales $305,000 $307,000 $310,000 Price

9 The value of House A, the subject property, will fall within the price range of the adjusted comparable properties that is, between $305,000 and $310,000. Large differences in value might suggest that the properties are not similar enough. In such case, the appraiser would have to recheck the characteristics of the comparable properties and the validity of the sales.

10 9. Conclusion: - The accuracy of an appraisal using the sales comparable approach depends on the appraiser s use of reliable adjustment values. Study the example cited in the study note 20 Valley View Road Attempt Question 2 Prepare a Market Valuation of a specified detached house using the 4 comparables