CHICAGO (June 7, 2012) – Characteristics of purchasers, not location, is most important in selecting comparable sales, according to an article published this week in The Appraisal Journal.
The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of the Appraisal Institute.
“Market Delineation,” by David A. Braun, MAI, SRA, looks at how to ensure the best comparable sales in a real estate appraisal. Appraisers typically analyze sale prices of comparable properties when they value a property.
Braun writes that the first step in selecting appropriate comparable sales is to identify the market of the property that is being appraised. “Market delineation is the primary analysis that leads to the identification of the appropriate comparables, so its importance cannot be overstated,” his article says.
Braun emphasizes that appraisers should look beyond mere proximity when selecting comparable properties. It is important to think of who will be purchasing and what properties they desire based on property characteristics, he writes, noting that neighborhood boundaries are a lesser consideration.
The article offers tests for determining if properties are in the same market: (1) Do the same potential purchasers tend to shop these properties? (2) Do the purchasers pay similar amounts for the properties’ features, e.g., similar dollar amounts per square foot? The author presents a mathematical model to confirm whether a property is in the same market and therefore an appropriate comparable to use in the appraisal.
The author cautions that markets are not necessarily contiguous. He shows how automated valuation models, which focus on location, may incorrectly choose comparable properties that are in close proximity, but not in the same market. This can occur, for example, when there are adjoining subdivisions or streets that attract different types of buyers. The author stresses, “The important concept is that markets are about people.”
Also in The Appraisal Journal’s Spring 2012 issue:
“Price, Value, and Comparable Distinctions in Distressed Markets,” by William G. Steinke, SRA, examines how reliance on distressed sales as comparables in non-distressed property appraisals, without appropriate analysis, produces low appraisals.
“Feasibility Study for Indoor Waterpark Resorts and Outdoor Waterparks,” by David J. Sangree, MAI, offers guidance on how appraisers can analyze a market to determine if a proposed waterpark is economically feasible.
“Daily Pricing: An Appraiser’s Dream” by D. Richard Wincott, MAI, looks at the valuation requirements for institutional-grade real estate in pension funds and the need for current real estate valuations in funds that are traded daily.