Weeding through comparable properties in a given market area then coming up with an accurate value conclusion for another property based on those comparables is an art form in the property valuation industry. In order to accurately translate comparable data into a final value conclusion, many factors must be taken into consideration. Itemized adjustments for each factor are very helpful in deriving accurate conclusions as these adjustments guide you toward a value conclusion and explain the reasoning behind the final value conclusion to the reader of these reports.
Since each comparable property in each market area is different in some way from the subject, adjustments are used to explain those differences and the values those differences create. Below is an excerpt from the Adjustments to Comparable Sales section taken from page 20 for the Fannie Mae Guidance for Lenders and Appraisers:
“The subject property is the standard against which the comparable sales are evaluated and adjusted. Comparable sales must be adjusted to the subject property.
The appraiser must make appropriate adjustments for location, term and condition of sale, date of sale, and the physical characteristics of the properties.
‘Time’ adjustments must be representative of the market and should be supported by the comparable sales whenever possible. The adjustments must reflect the time that elapsed between the contract date (or date of the “meeting of the minds”) for the comparable sale and the effective date of the appraisal for the subject property.
NOTE: Sales and financing concessions are adjusted to the market at the time of sale. Dollar adjustments must reflect the market’s reaction to the difference in the properties, not necessarily the cost of the difference. Each comparable sale used in the sales comparison approach to value must be analyzed for differences and similarities between it and the subject property.
Analysis and adjustments to comparable sales must be based on market data for the particular neighborhood and for competing locations – not on predetermined or assumed dollar adjustments.
Adjustments must be made without regard for the percentage or amount of the dollar adjustments.”
What this all means is that superior comparable properties should be adjusted downward and inferior comparable properties are adjusted upward in order to “bring them in line” with the subject. Generally, the dollar amount of the net adjustments for each comparable sale should not exceed 15% of the sales price of the comparable. When the adjustments exceed 15%, the valuator must comment on the reasons for not using a more similar comparable.
The value conclusion for the subject is then based on analysis of the comparable data, not on a predetermined perception of value. Let the data and adjustments do the talking and derive the final value conclusion based on the value range that the adjusted sold comparable properties have created.
Stay tuned for more help on adjustments!