Comps - More Than Meets the Eye
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If you have ever received or reviewed an appraisal on a piece of real estate, you will recognized the phrase "Comparable Sales Approach." The Comparables Sales Approach is a method of valuing real estate. The approach really is as simple as it sounds. You find sales that are "comparable" to the property in question and extrapolate a value range based on what comparable properties have sold for. But let the words of Richard Feynman, the late and great American physicist, serve as a warning to you. Feynman said, " The first principle is that you must not fool yourself , and you are the easiest person to fool." When it comes to actually determining what is and what is not a comparable sale, we often fool ourselves. Before you can identify comparable sales, you first have to identify what the property in question really is. Once you know what the property really is, then you can accurately identify what is actually comparable. Comparable buildings should be similar in the following areas: building size, market area, lot size, building age, and building finishes. If two buildings are comparable in many ways except for the finishes, you must have an idea of what it would cost to improve the building with older finishes so that it matches the other. If the cost to improve the building is roughly $20.00 per square foot, then factor this into the valuation. Now comes the tricky part. Once you have found comparable sold buildings, you have to identify the circumstances of the sale. Here are just a few of the different ways we identify the circumstances of the sale: 1) Market Sale: Was the property in question marketed to the local community and exposed to users, investors, brokers, developers, etc.?
Transcript of Comps - More Than Meets the Eye
If you have ever received or reviewed an appraisal on a piece of real estate, you will recognized the phrase "Comparable Sales Approach."
The Comparables Sales Approach is a method of valuing real estate. The approach really is as simple as it sounds. You find sales that are "comparable" to the property in question and extrapolate a value range based on what comparable properties have sold for. But let the words of Richard Feynman, the late and great American physicist, serve as a warning to you. Feynman said, "The first principle is that you must not fool yourself, and you are the easiest person to fool."
When it comes to actually determining what is and what is not a comparable sale, we often fool ourselves. Before you can identify comparable sales, you first have to identify what the property in question really is. Once you know what the property really is, then you can accurately identify what is actually comparable.
Comparable buildings should be similar in the following areas: building size, market area, lot size, building age, and building finishes. If two buildings are comparable in many ways except for the finishes, you must have an idea of what it would cost to improve the building with older finishes so that it matches the other. If the cost to improve the building is roughly $20.00 per square foot, then factor this into the valuation.
Now comes the tricky part. Once you have found comparable sold buildings, you have to identify the circumstances of the sale. Here are just a few of the different ways we identify the circumstances of the sale:
1) Market Sale: Was the property in question marketed to the local community and exposed to users, investors, brokers, developers, etc.?
2) Off-Market Sale: Did the sale happen without the building being taken to the market? Was the sale a quit-claim deed and/or was it a partner buying out another partner?
3) Neighbor Sale: Was the buyer of the property a neighboring owner? Often, neighbors value buildings at a higher premium than other buyers.
4) Assemblage Sale: Was the buyer of the property assembling the property as part of a larger land play?
5) Tenant Sale: Was the buyer of the property the existing tenant in the building? Often Tenant buyers will pay a premium due to the value they place on occupying and using the building.
6) User Sale: Was the buyer of the property an owner/user with plans to operate their business out of the property?
7) Investor Sale: Was the property bought by a local or national investor who has plans to lease the building?
8) Vacant Sale: Was the property vacant when it was purchased?
9) Improved Building Sale: Was the property recently improved or renovated prior to the sale?
10) Fixer-Upper Sale: Was the property in disrepair or in need of major improvements prior to the sale?
11) Development Sale: Was the buyer of the property a developer with plans to redevelop the existing site?
12) Recent Sale: Did the sale happen within the last 6-12 months?
13) Other Consideration Sale: Did the sale of the property include other considerations? For example, studios are often sold with equipment included in the price of the sale.
14) Distressed Sale: Was the sale under distressed conditions (past year’s taxes due, bank pressure, etc.)?
As you can see from the list above, finding true comparable sales is not as simple as it looks. Each of these sale types has an effect on the price of the comparable building and must be factored into the valuation of your property.
For this valuation method to actually be effective, the person or persons doing the valuation must know the market and know the conditions of the sale. If you simply go the tax records and try and pull a few recent "comps," you are going to fail at coming up with an effective valuation of the property you are trying to price.
To value anything effectively, you have to know the market, and to know the market you have to know the circumstances of the sales in your market. So, the next time someone refers to a "comp" sale, please ask them
to go into a bit more detail about how and why the property in question is a comparable sale.
