What Is First in the Order of Adjustments When Utilizing the Sales Comparison Approach?
The sales comparison approach is one of the most commonly used methods for appraising real estate properties. It involves comparing the subject property with similar properties in the market that have recently sold. The principle behind this approach is that a property’s value can be determined by analyzing the sale prices of comparable properties and making adjustments for any differences. However, when utilizing the sales comparison approach, it is essential to follow a specific order of adjustments to ensure an accurate and reliable appraisal. In this article, we will discuss what comes first in the order of adjustments and provide answers to some frequently asked questions related to this topic.
First in the order of adjustments when utilizing the sales comparison approach is the adjustment for financing terms. This adjustment is necessary because the sales prices of comparable properties may have been influenced by different financing methods, such as cash purchases or mortgage financing. To account for this, appraisers make adjustments to the sale prices to reflect the subject property’s financing terms.
After making the necessary financing adjustments, the next adjustment in the order is for the property’s location or site. Location plays a significant role in determining a property’s value, and appraisers consider factors such as proximity to amenities, schools, transportation, and views. If the comparable properties have better or worse locations than the subject property, adjustments are made to reflect the value difference.
Once the location adjustment is made, the next adjustment is for the property’s size or gross living area (GLA). Larger properties generally have higher values, and appraisers calculate adjustments based on the price per square foot of the comparable properties. Adjustments are made if the subject property has more or less square footage than the comparables.
After adjusting for size, the next adjustments are made for the property’s age and condition. Older properties may require more maintenance or renovation, which can affect their value compared to newer properties. Adjustments are made to account for the age and condition differences between the subject property and the comparables.
Next in line are adjustments for the property’s features and amenities. This includes factors such as the number of bedrooms and bathrooms, presence of a pool, garage, or other desirable features. Adjustments are made if the subject property lacks or has additional features compared to the comparables.
Following the adjustments for features and amenities, adjustments for market conditions are made. Market conditions can have a significant impact on property values, and appraisers consider factors such as supply and demand, economic trends, and changes in the local real estate market. Adjustments are made if the market conditions have changed since the sale of the comparable properties.
Finally, adjustments for seller concessions or financing incentives are made. Seller concessions can include items such as paying for closing costs or offering a reduced price. These concessions can impact the sale price of the comparable properties, and adjustments are made to reflect any differences.
1. Why is the adjustment for financing terms the first adjustment?
The adjustment for financing terms is the first adjustment because it helps to establish a level playing field by accounting for any differences in financing that may have influenced the sale prices of the comparables.
2. How are adjustments made for location?
Adjustments for location are made by comparing the subject property’s location with that of the comparables and determining the value difference based on factors such as proximity to amenities, schools, transportation, and views.
3. How are adjustments made for property size or GLA?
Adjustments for size are made by calculating the price per square foot of the comparables and adjusting the sale price based on the difference in square footage between the subject property and the comparables.
4. Why are adjustments made for age and condition?
Adjustments for age and condition are made to account for the differences in maintenance or renovation requirements between the subject property and the comparables. Older properties may have lower values if they require more upkeep.
5. How are adjustments made for features and amenities?
Adjustments for features and amenities are made by comparing the subject property’s features with those of the comparables and determining the value difference based on the presence or absence of desirable features.
6. Why are adjustments made for market conditions?
Adjustments for market conditions are made to account for changes in the real estate market since the sale of the comparables. This ensures that the appraisal reflects the current market conditions accurately.
7. What are seller concessions?
Seller concessions are incentives offered by the seller to the buyer, such as paying for closing costs or offering a reduced price. Adjustments are made to account for any concessions that may have impacted the sale price of the comparables.
8. Are there any adjustments for external factors like neighborhood trends?
Yes, adjustments for external factors like neighborhood trends are typically incorporated into the adjustment for location. If the subject property is located in an area experiencing positive or negative neighborhood trends, adjustments may be made accordingly.
9. Can adjustments be subjective?
Adjustments should be made based on objective data and analysis. Appraisers rely on market research, comparable sales data, and their professional expertise to determine the appropriate adjustments.
10. Is the order of adjustments fixed, or can it vary?
While the order of adjustments discussed in this article is commonly followed, it can vary depending on the specific property and market conditions. Appraisers may prioritize adjustments differently based on their professional judgment.
11. How are adjustments quantified?
Adjustments are quantified by analyzing the market data and determining the value difference between the subject property and the comparables for each adjustment category. Appraisers use their expertise to assign appropriate adjustment amounts.
12. Can adjustments be made for unique property characteristics?
Yes, adjustments can be made for unique property characteristics that are not easily quantifiable. Appraisers may use their professional judgment and market expertise to determine the adjustments for such characteristics.
In conclusion, when utilizing the sales comparison approach, it is crucial to follow a specific order of adjustments to ensure an accurate appraisal. The first adjustment is for financing terms, followed by adjustments for location, size, age and condition, features and amenities, market conditions, and seller concessions. These adjustments help appraisers determine the value difference between the subject property and the comparables accurately. By adhering to this order and considering the FAQs provided, appraisers can conduct a reliable and comprehensive analysis using the sales comparison approach.