The Sales Comparison Approach is a common method used in real estate appraisal to determine the value of a property by comparing it to similar properties that have recently sold in the same area. The appraiser identifies comparable properties (known as “comps”) that are similar in size, location, condition, and features to the property being appraised. Adjustments are then made for any differences between the comps and the subject property, such as variations in square footage, amenities, or age. The adjusted prices of the comps are used to estimate the market value of the property in question. This approach is widely used for residential properties but can also be applied to certain types of commercial real estate.

In this blog, we will analyze how commercial appraisers consider adjustments and the adjustment process.

What Do Appraisers Look For When Making Property Adjustments?

In the Sales Comparison Approach, property adjustments are a critical part of determining the value of a property. Appraisers make adjustments to account for differences between the subject property (the property being appraised) and the comparable properties (comps) used for comparison. These adjustments help to ensure that the appraised value accurately reflects the market value by considering the unique characteristics of each property. Here’s how appraisers approach property adjustments and the factors that influence them:

Identifying Key Differences

The first step in making adjustments is identifying the key differences between the subject property and the comps. These differences can include a variety of factors, such as:

Location: Properties in different locations, even within the same general area, can have different values. For example, a property closer to a city center, a school district, or a desirable neighborhood may be worth more than a similar property in a less desirable location.

Size and Square Footage: Differences in the size of the properties, particularly in square footage, often require adjustments. Larger properties generally have higher values, so if the subject property is larger or smaller than the comps, the appraiser will adjust the value accordingly.

Condition and Age: The age and condition of the properties can significantly impact value. A newer property or one that has been recently renovated will typically be worth more than an older property in need of repairs or updates.

Amenities and Property Features: Differences in amenities and property features, such as higher clear heights and number of loading docks for an industrial property or renovated units for an apartment complex can also affect value. The appraiser will adjust for these differences to make the comps more comparable to the subject property.

What are the Different Types of Adjustments?

Adjustments can be either positive or negative, depending on whether the comp property is inferior or superior to the subject property in a specific aspect:

Positive Adjustments: If the comp is inferior to the subject property in a particular aspect, a positive adjustment is added to the comp’s sale price to make it more comparable. For example, if the comp is in an inferior location, the appraiser might add value to the comp’s sale price to account for this difference.

Negative Adjustments: If the comp is superior to the subject property, a negative adjustment is subtracted from the comp’s sale price. For instance, if the comp has a considerable amount of excess land, the appraiser might subtract value from the comp’s sale price to account for the difference.

How do Appraisers Weigh Their Adjustments?

After making adjustments, the appraiser will assess which comps are most similar to the subject property and give them more weight in the final valuation. The adjusted sale prices of the comps are then averaged, with more similar comps influencing the final value more heavily.

Market Conditions and Timing: Adjustments also account for market conditions and the timing of sales. For example, if a comp sold in a stronger market or during a different season, an adjustment might be necessary to reflect changes in market conditions. Similarly, economic factors such as interest rates, inflation, and local employment trends can influence how adjustments are made.

Subjectivity and Expertise

While there is a systematic approach to making adjustments, there is also a degree of subjectivity involved. The experience and expertise of the appraiser plays a significant role in determining the appropriate adjustments. Appraisers use their knowledge of the local market, their understanding of buyer preferences, and their professional judgment to make accurate and fair adjustments.

Property adjustments are a fundamental part of the Sales Comparison Approach in real estate appraisal. By carefully evaluating differences between the subject property and comparable properties, and making informed adjustments, appraisers can arrive at a market value that reflects the true worth of the property. Understanding how these adjustments work helps both buyers and sellers better appreciate the appraisal process and the factors that contribute to a property’s valuation.

By Thomas McCoy & William Wilson