R2B33011 Lesson06

LESSON 6
The Direct Comparison Approach Part II
Assigned Reading
1.
Appraisal Institute of Canada & Appraisal Institute (US). 2010. The Appraisal of Real Estate (3rd
Canadian Edition). Vancouver: UBC Real Estate Division.
Chapter 15: Applications of the Direct Comparison Approach
Recommended Reading
Selected readings can be downloaded via the "Online Readings" link on the BUSI 330 Course Resources
webpage. Please note that recommended readings are provided only for your information, should you wish to
learn more about these topics. Recommended readings are NOT tested on the final examination.
1.
The course website includes sample, real-life appraisals. Certain content may be blocked out for reasons
of confidentiality. Pages 43-55 of The Alexandria Appraisal is the application of the direct comparison
approach for a retail property in a small town. This is a good example of the qualitative approach to
valuing a retail property, where there are several comparables, but where the degree of comparability is
not conducive to a quantitative adjustment analysis.
2.
Use of Comparables. Appraisal Institute of Canada Claim Prevention Bulletin CP-17, also known as
Professional Excellence Bulletin (PP-17-E). Revised March 2007.1
Learning Objectives
After completing this lesson, the student should be able to:
1.
Describe the process for appraising residential and simple commercial real estate using the direct
comparison approach.
2.
Evaluate comparables for similarity to the subject property.
3.
Explain the quantitative analysis basis for adjusting the value of comparables and know how to adjust
for these differences.
4.
Demonstrate how to apply qualitative analysis when comparing comparable sales with the subject
property.
5.
Reconcile the quantitative and qualitative estimates into a final value estimate.
http://www.aicanada.ca/images/content/docs/aic-ppb17-use-of-comparables-english.pdf
6.1
Lesson 6
Instructor's Comments
Chapters 13 and 14 introduced the student to the basic theory and procedures of the direct comparison approach.
Chapter 15 now focuses on the common techniques for making adjustments which includes both qualitative and
quantitative methods.
Much of this chapter is devoted to the analysis of income producing properties. In this lesson, we will
supplement the textbooks office and industrial building examples by illustrating how these procedures would be
applied in a residential analysis.
Quantitative adjustments are based on measurable transactions such as changes in sale prices resulting from
changes in market conditions, differences in unit prices paid for lots of different size, etc., that reflect market
behaviour. There is usually sufficient market evidence to support quantitative adjustments; therefore an appraiser
must know how to apply quantitative procedures.
Qualitative analysis considers the forest rather than the trees when comparing comparable sales with the subject
property. It is the big picture approach to direct comparison where one forest (the comparable sale) is compared
with another forest (the subject property), without applying numerical values to individual forest characteristics
such as soil structure, water flow, terrain, and ease of access. An underlying prerequisite to proper application
of the qualitative technique is experience in order to recognize value and be able to reasonably decide how the
value of your subject property compares, overall, to a comparable sale. This required experience can only be
obtained through working closely with a real estate market, to the point where you have an intuitive "feel" for
value. This is the reason for articling programs, such as that required by the Appraisal Institute of Canada, in
which a candidate appraiser must understudy a practicing designated appraiser.
If you routinely attempt to apply both a quantitative and a qualitative approach when applying direct comparison,
the crosscheck provided will give you greater confidence in your value conclusions.
The student will note in Chapter 15 that quantitative adjustments are displayed in a market data grid which
incorporates an adjustment table. Qualitative adjustments are analyzed in relative comparison tables. These are
essential elements of the direct comparison approach, in support of the adjustment analysis and justification of
the conclusion of value.
Reading Notes
Chapter 15 Applications of the Direct Comparison Approach
Quantitative Adjustment Techniques
In the previous lesson we mentioned that adjustments should be done in a certain order to ensure the adjusted
price reflects a true market value. Once again, the table from Lesson 5 is shown below in order to refresh your
memory on the order and rationale for adjustments.
Elements 1 to 5 are considered first to arrive at a value, and are applied in sequence. Then, elements 6 to 10 are
considered, adding or subtracting adjustments as needed. Elements 6 to 10 need not be applied in order.
6.2
Element of Comparison
Rationale
1.
Rights Conveyed
Property rights greater or less than subject are first.
2.
Financing Terms
Favourable financing distorts original price (Dollar).
3.
Conditions of Sale (Motivation)
Undue pressure at time of sale lowers price (Dollar).
4.
Expenditures Made Immediately

After Purchase
Monies to be spent by the purchaser to make it usable for their

purpose and reflected in the price paid.
5.
Market Conditions (Time)
Reflects changes in market over time (Percentage).
6.
Location
The impact on price because of different locations; in effect, this is

difference in land values (Dollar or Percentage).
7.
Physical Characteristics
Differences in size, age, condition, etc. (Dollar).
8.
Economic Characteristics
Aspects of a property that affect its net operating income.
9.
Use/Zoning
Factors that result in differing property utility, arising from factors

such as zoning bylaws, building codes, landscaping, etc.
10. Non-Realty Items
Personal items, business concerns, or other items that do not involve

real property.
Real Property Rights Conveyed

With single-family properties, if the appraiser discovers that the fee simple of a comparable has been impaired,
then some adjustment has to be made. Students should go back and read the section on the bundle of rights and
some of the restrictions placed on it. In many instances, real property rights will not be a problem because there
are usually sufficient residential sales such that any sale with an impaired fee simple can be discarded, resulting
in no need for an adjustment.
If the subject property has its fee simple impaired, then all of the comparables' fee simple interests would have
to be adjusted so that they are the same as the subject. If this is not feasible, then the subject property's
unencumbered market value could be estimated and then adjustments made to reflect its impaired fee simple.
Either way, this is not an easy task and the appraiser has to be very careful in the adjustments made.
One of the areas where an impaired fee simple might be found is where a landowner has an easement across
their property, say for a public utility right-of-way, which limits the use of some of the site. When it was
granted, a value was placed on the easement and the property owner received some monies for granting the
easement. This amount of money may assist the appraiser when making the adjustment as it will give them an
idea of the compensation received for granting the easementkeep in mind this is only a guide, and the historical
cost may not be indicative of the market value impact as of the effective date of appraisal.
The best way to make an adjustment like this is to see if any other properties with similar impairments are
located in the neighbourhood and have they sold or been listed for sale in the past. If not, then the appraiser may
have to go into other neighbourhoods or municipalities to see if there are any sales with this impairment. If there
are and they have sold, then the appraiser can figure out how much less they sold for in relation to other
properties without the impairment. It may be possible to derive a percentage difference to show how much less
an impaired property sells for in relation to an unimpaired property. Again, not an easy task, but it is one way of
trying to see how the market reacts to properties whose fee simple interest is partially impaired.
6.3
Lesson 6
The same process could be applied to properties that were listed for sale to see if any offers were received or
what interest was shown in a property when it was listed. These are some of the possible methods to find what a
property with impaired rights may be worth on the market.
Financing Terms or Cash Equivalency
The illustration below shows an example of this type of
calculation.
Note that this type of calculation is not

required in this course and will not be tested
on the assignment or final examination; this
is provided as an illustration only.
Illustration of Adjustment for Financing
Jane Appraiser is appraising a property, but has found that one of her comparables was sold subject to a
vendor takeback mortgage. The mortgage, for $25,000, was amortized over 25 years with monthly payments
and had a 5 year term. Payments were rounded to the next higher cent. The contract rate of interest on the
mortgage was j2 = 10% while market lending rates for similar mortgages were j2 = 11%. What adjustment
is required for this beneficial financing?
Solution:
(Note: The steps shown below are for the Hewlett Packard calculator HP10B and HP10BII.)
The property described was sold subject to a vendor takeback mortgage which was written at an interest rate
below market rates. As this is a feature of the comparable which is superior to the subject property, a
negative adjustment will have to be made for this mortgage. The amount of the adjustment will depend on
Jane's opinion of how the beneficial financing was reflected in the sale price. A good guideline is to calculate
the cash equivalent price of the comparable (i.e., what it would have sold for with "typical financing").
Below is the calculation of the adjustment necessary to find the cash-equivalent price.
continues
6.4
(i)
Calculate the Equivalent Nominal Contract Rate Compounded Monthly, the Monthly Payment and the
Outstanding Balance due at the end of the term.
Calculation
Press
Display
Comments
10 O NOM%
10
Entered stated nominal rate
2 O P / YR
Entered stated compounded frequency
O EFF%
10.25
Compute equivalent effective annual rate
12 O P / YR
12
Enter desired compounding frequency
O NOM%
9.79781526228
Nominal contract rate with monthly compounding
25000 PV
25,000
Actual loan amount
300 N
300
Enter amortization period in months
0 FV
FV not to be used
!223.621806233
Calculated payments
!223.63
Actual (rounded) payments
PMT
223.63 /
PMT
60 INPUT O AMORT
PER 60-60
===
23,497.3372375
(ii)
Outstanding balance after 60th payment
Calculate Equivalent Nominal Market Rate with Monthly Compounding and the Market Value of the
Mortgage (Present Value of Payments and Outstanding Balance at Market Interest Rate)
Calculation
Press
Display
Comments
11 O NOM%
11
2 O P / YR
O EFF%
11.3025
12 O P / YR
12
O NOM%
10.7560727103
Nominal market rate with monthly compounding
60 N
60
Enter contract term in months
!23,497.34
OSB to be received at the end of the term
24,099.2595276
Market value of payment stream over the loan term
23497.34 /
PV
FV
Adjustment required = 25,000 - 24,099.26 = $900.74
continues
6.5
Lesson 6
The sale price of this comparable would need to be adjusted downwards by $900 (rounded) to reflect its cash
equivalent price. The actual adjustment required for this comparable to reflect the beneficial financing may
vary from this amount, depending on the appraiser's judgment of how much this affected the sale price. In
other words, do not rely on this calculated figure without talking to the buyer or seller to see how they
considered the beneficial financing when making or accepting the offer.
Alternative Solution:
Calculate the extra monthly payments and extra outstanding balance as a result of the higher interest rate.
Find the market value of these cash flows over the loan term.
Calculation
Press
Display
Comments
11 O NOM%
11
2 O P / YR
O EFF%
11.3025
12 O P / YR
12
O NOM%
10.7560727103
Nominal contract rate with monthly compounding
25000 PV
25,000
Actual loan amount
300 N
300
Enter amortization period in months
0 FV
FV not to be used
!240.632292386
Calculated payments
!240.64
Actual (rounded) payments
PMT
240.64 /
PMT
60 INPUT O AMORT
PER 60-60
===
23,692.0758866
Outstanding balance after 60th payment
Calculate extra payments:
240.64 ! 223.63 = 17.01

Calculate extra outstanding balance:
23,692.0758866 ! 23,497.3372375 = 194.7386491

= 194.74
continues
6.6
Calculate the present value of the extra payments and outstanding balance with the increased interest rate:
Calculation (continued)
Press
Display
60 N
Comments
60
Entered contract term in months
194.74 /
FV
194.74
Extra outstanding balance at end of term
17.01 /
PMT
!17.01
Extra payment
900.742880535
Market value of payment stream over loan term
PV
The adjustment required is $900.74.

There are two other, simple techniques to quantify an adjustment for financing or cash equivalency. An analysis
of paired sales, one with normal financing and the other with the atypical financing, can be paired to indicate the
amount of adjustment. You may wish to review the material on paired sales analysis in Lesson 5. Or, parties to
the transaction could be interviewed to provide the appraiser with an indication of the importance, and perhaps
quantum, of the financing situation. The best evidence of the adjustment amount is that directly derived from
analyzing market transactions, i.e., paired sales. However, often there is insufficient data and other techniques
such as the calculation demonstrated in the above illustration are used. Probably the weakest source upon which
to base a quantification of a financing adjustment is via interviews.
Conditions of Sale or Motivation
Referring back to the definition of market value, it states "a willing buyer and a willing seller who are not under
any undue pressure". There may be instances when one of the parties is very anxious to buy or sell the property
and, as a result, is willing to pay more than market value or will take less than market value. Were the buyer and
seller in an arms-length relationship? In such situations, the market value has to be adjusted to reflect these
circumstances.
Again, if there is sufficient sales data, then these comparables can and should be discarded. But if they must be
used, then the appraiser should try and find out what dollar value was attributable to the motivation. The only
way to do so is to interview one or more of the parties to the transaction: buyer, seller, sales agent or attorney.
Expenditures Made Immediately After Purchase
As stated in the text, there may have to be an adjustment for expenditures made immediately after purchase.
Expenses like fixing broken doors, windows, fences, driveway/walkways, or replacing the old roof should be
considered. Major repairs to the interior of the home to make it more livable should also be considered, e.g.,
broken or damaged bathroom fixtures, or replacement of hot water tanks or furnaces. In the cost approach, we
adjusted for physical deterioration deferred maintenance which refers to items that should be repaired
immediately. The costs to repair are market costs based on quotes from contractors to repair the item today.
The estimated value of the subject is based on comparable sales in similar condition. In most circumstances, the
subject property is in good condition, or where all of this work has been done. When a person purchases a
home, they will probably consider an offer price assuming it is in good condition and then deduct some figure
for the amount they will need to spend on the home to bring it back to a reasonable condition. It is the
appraiser's job to review these expenditures to see if they are reasonable and, when the work is finally
undertaken, if the full value of the home has been restored.
6.7
Lesson 6
Often, appraisers have to estimate the value of residential properties that have been damaged by the former,
foreclosed owner; have been sitting vacant for a period of time; or have been illegally occupied and used for
illegal purposes. In these cases, the costs to remediate all the problems could be a significant challenge.
Market Conditions (Time Adjustment)
When market conditions are changing, i.e., prices are increasing or declining, then the price of the comparable
has to be adjusted to reflect what it would sell for today, as opposed to what it sold for a few months ago.
When carrying out a time adjustment, it is best to use at least
two sets of paired sales or resales in order to ensure the data
is reasonably accurate. If possible a few more sets should be
examined to see that the results of each set are fairly close to
each other. Just as one sale does not necessarily establish the
market, one single indicator of an adjustment may also not
reflect the market. Anomalies often occur. The more data
that is analyzed, the more reliable and convincing is the
result.
It is important to clearly establish the date of

sale when analyzing the adjustment for
market conditions. Technically, the date of
sale is the date of creation of a binding,
unconditional contract for the sale or lease.
Registration dates can occur at much later
dates, and if the market is quite active, can
give misleading results if used to represent
the date of sale.
The following data will be used to illustrate paired sales

adjustments for time, location, and condition. When using the paired sales analysis it may not be possible to find
a pair of sales with the same sales date to prove an adjustment, say for a single car versus a double car garage.
For instance, one sale may have occurred 6 months ago, while the other sale occurred today. The appraiser
would first adjust the older sale to today's date using the percentage adjustment for market conditions (time
adjustment). Once adjusted, the difference between the two sales would then reflect the market value of a single
versus a double car garage.
Data Summary
Sale #
House Size
2
(m )
Sale Date
Location
Condition
(sq.ft.)
Sale
Price($)
Price Per
2
sq. ft.
90
969
Sept
Good
Average
122,250
$1,358
$126
98
1,055
Sept
Poor
Good
131,000
$1,337
$124
98
1,055
July
Poor
Good
133,000
$1,357
$126
90
969
March
Poor
Average
123,500
$1,372
$127
90
969
March
Good
Average
126,900
$1,410
$131
98
1,055
July
Poor
Average
130,000
$1,327
$123
Subject
98
1,055
Sept
Good
Good
Note: To convert from m2 to square feet (sq. ft.), multiply by a factor of 10.764.
Here is an example of a time of sale adjustment. Assume that the valuation date is September 15, the same year
as the comparables sold; and all sales occurred at mid-month.. Based on the data summary, sales #s 1 and 5 are
identical except for the sale date; as are sales #s 2 and 3.
Sale #
House Size
2
Sale Date
Location
Condition
(m )
(sq.ft.)
90
969
Sept
Good
Average
90
969
March
Good
Average
Sale
Price($)
Price Per
2
sq. ft.
122,250
$1,358
$126.16
126,900
$1,410
$131.00
-$ 52
-$4.83
DIFFERENCE
2
or -$8.67/month/m (-$.81/month/sq. ft.)
6.8
Adjustment is for a period of 6 months.

Sale #
House Size
2
Sale Date
Location
Condition
(m )
(sq. ft.)
98
1,055
Sept
Poor
Good
98
1,055
July
Poor
Good
Sale
Price($)
Price per
2
sq. ft.
131,000
$1,337
$124.21
133,000
$1,357
$126.07
-$ 20
$1.86
DIFFERENCE
2
or -$ 10.00/month/m (-$0.93/month/sq. ft.)
Adjustment is for a period of 2 months.

The analysis above indicates a declining market within a range of -$8.67 and -$10.00/m2 (-$0.81 and
-$0.93/sq.ft.) per month. As each indication is given equal weighting, the data is reconciled to -$9.36/m2
(-$0.87/sq. ft.) per month.
Alternative Method:
With the Time of Sale Adjustment, a rate of increase or decrease can be calculated on a percentage basis. Sale
#1 sold for $122,250 on September 15th and a similar property, Sale #5, sold for $126,900 on March 15th, a
difference of $4,650. Dividing $4,650/$126,900 is a 3.66% decrease from March to September (6 months). This
is an average decline in the market of 0.6% per month.
Doing the same analysis for sales #2 and #3 indicates a monthly decline of 0.75%. The appraiser may find a
third pairing to try and narrow the difference. Once the analysis is complete, it is the appraiser's job to reconcile
these percentage figures into a final figure to indicate how much the market has declined over the past few
months. For example, the appraiser may decide on a rate of 0.68% per month.
By using percentage figures, the appraiser may be able to compare their analysis with published figures from the
local real estate board or other reliable sources to support their independent analysis. Lesson 5 illustrated one
such source.
Other Market Condition Adjustment Techniques
In addition to paired data analysis and resales analysis, there are several other practical methods that are applied
to quantify the adjustment for market conditions (time). These include:
C
C
C
C
C
C
C
C
C
analysis of multiple listing system (MLS) statistics

ongoing, in-office research, on-going study of the list/selling price ratio
national surveys [an example was presented in Lesson 5 - Royal LePage Housing Survey.]
rental and capitalization rate changes - for income properties, analyzing these key elements of revenue
and profit may have a direct correlation to income property values and rates of change in value over
time
land developers= price changes
builders= price changes
interest rate changes
market activity changes
other market analyses of data that can be shown to have a direct correlation with real estate market
values
6.9
Lesson 6
Lets examine one of these techniques - analysis of MLS statistics.

MLS statistics can be analyzed either graphically or by using descriptive statistics.
MLS Graphs: Most real estate boards publish monthly MLS statistics, although some boards restrict the use of
their statistics to members of the board, such as real estate brokers and appraisers. Figures 6.1 and 6.2 are based on
statistics from the Victoria Real Estate Board MLS, and date back to July 2007. These graphs provide market-based
indications of market trends, in this case for single-family dwellings (SFD), condominium apartments and
townhouses in the Victoria metropolitan area. These graphs indicate the state of the market overall. Because market
value trends vary by neighbourhoods, these graphs should be considered in conjunction with more subject-specific
market conditions adjustments. This will be illustrated in the MLS median technique in the next section. Figure 6.1
tells us that the market for SFDs in the Greater Victoria Area was healthy. Sale prices were increasing at a fairly
constant rate of 0.9% per month but are now showing signs of levelling.
Figure 6.1
Average Selling Prices
6.10
Figure 6.2 shows that total listings increased, but the sales and new listings graph shows that the sales/listings ratio
was slightly higher over the past twelve months than over the preceding twelve months. Therefore, it is reasonable
to conclude that the market was not in an over-supplied condition, notwithstanding the increase in total listings, and
that the levelling price trend would continue for a while.
Figure 6.2
Active Listings, New Listings, and Sales
These types of graphs are readily available from most real estate boards. They are simplistic and general, but
they provide a good starting point to estimate a market conditions adjustment. The example below shows a more
customized application based on MLS data.
Figure 6.3 illustrates monthly average and median sale prices over the period 1996 to 2008. This chart was
created by the appraiser using Microsoft Excel and MLS statistics. Because sale prices vary throughout the year,
each point of this average sale price trendline comprises the average sale price over the previous 12 months
divided by the average sale price over the 12-month period January 1996 to December 1996. The 1996 base year
has a value of 1 and subsequent periods reflect changes from this base year value. August 2006, for example,
has a factor of about 2.08. This means that the 1996 base year value increased by a factor of 2.08 as at August
2006. If the 1996 base year average sale price had been $100,000, then the August 2006 market conditions
adjusted average sale price would be $100,000 x 2.08 = $208,000. This produces a 12-month moving average
of sale price trends, thereby removing the volatility evident in the graphs of Figure 6.1.
6.11
Lesson 6
Consider the following example where the effective date of valuation is July 2007 and the sale date of an index is
August 2006. To determine a market conditions adjustment for August 2006, Figure 6.3 below indicates that the
August 2006 factor on the average trendline (upper red line) was about 2.08 and the July 2007 factor was about
2.23. The market conditions adjustment from August 2006 to July 2007 is (2.23 2.08) 1 = +7.2%.
Figure 6.3
Single Family Dwelling Price Trend 1996 Base
The example in Figure 6.3 illustrates how generic MLS statistics can be customized for a more effective
application. Many appraisers update their market data monthly as MLS statistics are published. A graph like this,
over time, provides a ready reference for market condition adjustments in a general area. The next section
illustrates the use of MLS medians to supplement the graphic analysis and also to drill down deeper into submarkets.
MLS Median: The graphical method in the previous section illustrates a market conditions adjustment for an
overall market. MLS statistics can also be used to identify price changes within a specific neighbourhood.
The steps include:

1. Analyze MLS sales data for the subject neighbourhood to determine the current median sale price for
properties of the subject type (or as of the date of valuation, for a retrospective appraisal).
2. Determine the median sale price for similar properties at the time that the index was sold.
3. Divide the current median price by the "historic" median, to determine the percentage change. This is
the necessary adjustment for the index in order to account for market value changes between its sale
date and the valuation date, assuming its market value changes at a similar rate and direction as similar
properties in its general area.
Consider the following example of this adjustment technique: assume the subject property is a single-family
detached dwelling, the effective date of appraisal is January 1, 2009, and the sale date of the index is July 1,
2008. Analysis of MLS sales in the subject neighbourhood indicate that the median sale price for a single-family
detached dwelling as at the end of December 2008 was $350,000 and as at the end of June 2008 it was $325,000.
The market conditions adjustment is ($350,000 $325,000) - 1 = +7.7% over the six month period. Although
this median value is based on different types of single-family detached dwellings such as bungalows, twostoreys, and split-levels, the rate of change in market conditions will generally be similar for all of these types of
6.12
properties within the same neighbourhood. This is supported by the principle of conformity, that states "to
maintain maximum value, land must be utilized to reasonably conform with the standards of the area."
This analysis provides support for the market conditions adjustment. It may also help determine value loss due to
a subsequent event for example, a loss in value due to road widening, "grow-ops", close proximity to a new
rapid transit line, or other impairments.
The rate of change indicated by these statistics should ideally be cross-checked with the rate of change indicated
by the MLS graphs. Adjustment support is stronger if confirmed and verified by more than one method.
Location
Like the market condition adjustment, at least two sets or more of paired sales should be used in order to
establish an adjustment amount or percentage adjustment figure.
The following is an example of a location adjustment
Sale #
House Size
2
Sale Date
Location
Condition
(m )
(sq. ft.)
90
969
March
Good
Average
90
969
March
Poor
Average
Sale
Price ($)
Price per
2
sq. ft.
126,900
$1,410
$131.00
123,500
$1,372
$127.46
$38
$3.53
DIFFERENCE
The residual difference in sale price attributable to location in this example is $38 per square metre to go from a
poor to a good location or vice versa.
Alternative Method:
Instead of doing this comparison based on the size of the home, an alternative method is to calculate the
percentage difference between the two locations. The difference in the selling prices between Sale #4 ($123,500)
and #5 ($126,900) is $3,400. Dividing the difference by sale #4 ($3,400/$123,500) gives us 2.75%. In other
words, location #5 is 2.75% better than location #4. Once this percentage is calculated, it can be used to adjust
other comparables when their locations are different. The subject=s location is stated as good. Therefore, the sale
prices of any comparables where the location is rated as poor, can be adjusted upward by 2.75% to account for
this value-impacting difference between the comparable and the subject.
Location and its impacts on value can vary greatly. Locational factors can include proximity to noise or other
nuisance, to amenities, etc. The appraiser must carefully investigate to ensure that locational attributes are
identified and that different attributes are each analyzed to determine their impact on value.
Other practical techniques for determining location adjustments include:
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trend analysis of rental rates (for income property appraisals)

analysis of land sales ONLY IF it can be established that the trends and indicators appropriate to
undeveloped land sales is the same as for improved sales (see cautions at the end of this lesson)
analysis of differences in capitalization rates of properties that are similar, except for location (for
income property appraisals)
6.13
Lesson 6
Physical Characteristics
The following is an example of an adjustment for property condition:

Sale #
House Size
2
Sale Date
Location
Condition
(m )
(sq. ft.)
98
1,055
July
Poor
Good
98
1,055
July
Poor
Average
Sale
Price ($)
Price per
2
sq. ft.
133,000
$1,357
$126.07
130,000
$1,327
$123.28
$30
$2.79
DIFFERENCE
The difference in sale price attributable to condition in this example is $30 per square metre to go from a good to
average condition house or visa versa.
Alternative Method:
Sale #3 is in good condition and sold for $133,000, while sale #6 is in average condition and sold for $130,000.
The difference of $3,000/$130,000 is 2.31%. Therefore, we can say that homes in good condition are 2.31%
more valuable than homes in average condition. When doing these types of adjustments, you should ensure that
at least two sets of pairing are used so that the data is well-supported.
House Size
Often the appraiser has to adjust for the size of the home in relation to the subject. The adjustment is made on
the value of the improvements (called "depreciated value") of similar comparable houses.
As an example, consider the sales of three similar properties located close to the subject and selling near the
valuation date (so no time adjustment is required). The comparables used in this analysis could be the ones used
in the direct comparison approach to help estimate the value of the subject or they could be other comparables
used only to help estimate the adjustment for size.
Next, the appraiser has to estimate the land value of the comparables, the depreciated value of the site
improvements, and the depreciated value of the garage. These are deducted from the selling price leaving the
depreciated value of the improvements.
Dividing this residual value by house size indicates a range of values from $602.04 to $613.88 per square metre.
Note that as the homes get larger the rate per square metre is less.
Sale #
Size
(m2)
Date
Sale
Price
Lot
Value
Site Imp.
Garage
Dep.
Value
Dep. Value
(m2)
90
Sept
$122,250
$60,000
$2,000
$5,000
$55,250
$613.88
94
Sept
$126,000
$62,000
$2,000
$4,900
$57,100
$607.45
98
Sept
$128,000
$61,000
$2,500
$5,500
$59,000
$602.04
If the subject is 92 square metres in size and the first comparable is 94 square metres, then the comparable
requires a downward adjustment of 2 square metres or $611 per square metre for a total of $1,222.00.
This is then repeated for the other comparables where a size adjustment is required.
6.14
Use/Zoning
An adjustment may have to be made for any differences in zoning, although with single-family residences there
should be enough sales with the same zoning characteristics that this adjustment is unnecessary.
If it has to be undertaken, then only single-family zoned sites should be used which have similar characteristics.
In other words, the zoning may vary because of slight modifications such as site coverage, building height, or
setbacks.
Do not try to compare single-family with duplex zoned sites or with multiple-family sites. They are in
completely different markets and there is usually no relation between them.
Non-Realty Component of Value
Almost every residential sale includes certain used appliances such as a fridge, stove, and maybe a washer and
dryer. In relation to the overall selling price, the value of these items is insignificant. Therefore, appraisers do
not normally adjust for these items (it can also be difficult to determine an amount for these items). However, if
the sale price seems outside the normally expected range for that property type, then the appraiser should enquire
if anything else was included. Sometimes there can be other assets involved other than cash, such as other assets
taken in trade (e.g., a car or boat) or other real estate (e.g., a vacant parcel of land or another home).
Consideration of Multiple Adjustments
As a general rule, always remember that adjustments must be supported by market evidence. In other words, you
must present actual sales data which shows the difference in value you are relying upon. Real estate board
published statistics can be used to back up your own market analysis, but should not be relied on as a primary
source of valuation information.
Also, do not make any unsupportable comments like: "The Realtor said the market went up 5%". Finally,
remember that cost-to-build does not necessarily reflect market value, but it can serve as a rough guide as to how
the market makes a decision or takes action.
Summary
When the appraiser has gathered all of the sales comparable information and made the adjustments, it is time to
prepare a grid to display the results and to assist in arriving at a final estimate of value. A sample table is shown
below for two comparables.
All of the adjustments should be supported with market data which explains how they were calculated. In some
cases, the adjustments are percentages which have to be converted to a dollar figure. They are shown in the grid
to assist the reader in understanding the adjustment process.
Comments on Adjustments
The following is a hypothetical example, illustrating an adjustment grid. Normally, for residential appraisals, 3
to 5 comparable properties are analyzed -- three seems the accepted minimum via observed practice. To keep our
example simple and easier to follow, only two comparables will be anlayzed in the grid.
A financing adjustment of $2,000 was required for Sale 2 to reflect a beneficial mortgage that was assumed by
the purchaser. Discussions with the vendor and buyer confirmed this amount is reasonable. (The appraiser
should show their calculations under this heading.)
6.15
Lesson 6
A condition of sale adjustment of $1,000 was made to Sale 1 as the vendors indicated they were anxious to sell
before the end of the month so that they could complete the sale of their new house. Therefore, they accepted a
slightly lower offer.
Sale 1 was also adjusted for time as it sold one month previously and the market increased by 1% during that
time. This was proven by using paired sales analysis and supported by statistics from the local real estate board.
(The appraiser should insert a chart and their findings here to prove the 1% adjustment.)
A size adjustment was made to both sales to reflect that they were slightly smaller than the subject. (Again, a
chart and discussion showing how the appraiser arrived at the adjustment should be included here.)
Both locations were slightly inferior to the subject's, so the comparables required an upward adjustment which
was based on market evidence.
Also, the comparables' basement areas were not finished as extensively as the subject so an adjustment was made
to reflect that Sale 1 did not have a recreation room and Sale 2 did not have a bedroom like the subject. Again,
the adjustment is derived from the market and is based on the depreciated cost to finish a basement.
Both comparables had double garages, while the subject's was a single. Therefore, a negative adjustment was
applied to the comparables to make them equal to the subject's single garage. (The appraiser should insert the
chart showing how this adjustment was researched and applied.)
Based on the appraiser's experience, they felt that the comparables' condition was slightly inferior to the
subject's by about 1%. This could be considered a qualitative adjustment since there is no hard and fast evidence
to prove it, except that the subject appeared better cared for and the exterior had recently been painted so its curb
appeal was better than the comparables.
Sample Market Data Grid : Comparison and Adjustment of Market Data
Adjustment
Subject
Sale Price
Sale 1
Sale 2
$200,000
$208,000
Real Property Rights
Fee simple
$0
$0
Financing Adjustment
Typical
Financing
$0
-$2,000
$200,000
$206,000
None required
$0
$0
None
$1,000
$0
Adjusted Price
Expenses Made Immediately After
Purchase
Conditions of Sale
Adjusted Price
Market Conditions
$201,000
Current
1%
Adjusted Price
$2,000
$206,000
0%
$203,000
$206,000
$1,500
$1,000
Other Adjustments
Size
Location
3%
$6,100
2%
$4,100
Basement Finish
$2,500
$1,500
Garage
-$3,000
-$2,500
Condition
Final Adjusted Price
6.16
1%
$2,000
$212,100
1%
$2,100
$212,200
Sample Market Data Grid : Comparison and Adjustment of Market Data

Adjustment
Subject
Total Net Adjustments

Total Net Adj. as % of sale price
Total Gross Adjustment
Total Gross Adj. as % of sale price
Sale 1
Sale 2
$12,100
$4,200
6%
2%
$18,100
$13,200
9%
6%
The final adjusted price of the two comparables is quite close at $212,100 and $212,200. The starting range has
been reduced from $8,000 to almost zero. Remember that the purpose of adjustments is to narrow the range and
not widen it. If the range widens, then you need review the adjustments and find out why.
The total net adjustments are 6% and 2% of the original selling price which is very reasonable, while the gross
adjustments are 9% for Sale 1 and 6% for Sale 2. Again, this likely represents an acceptable range; however,
because Sale 1 is slightly high, there will be less emphasis placed on it in the final analysis.
The procedure is then repeated for any other comparables.
Remember
adjustments should be market derived and not cost based ... since cost
does not necessarily equate to value. Only if cost is shown to equate to
value can adjustments be cost based. Remember Figure 2.1 in Lesson 2.
Reconciliation
The comparable sales which are to be relied upon in an appraisal should be selected because of their high degree
of comparability with the subject property. However, since no two sales are identical, it is likely that the
comparables will indicate different value estimates, resulting in a range of values. Reconciliation is the process
whereby the appraiser analyses a range of comparative values and applies his/her best judgment to arrive at a
final value figure for the subject property. The following are the various tools the appraiser uses to assist this
process.
Technique
Strength/Weakness
Mean Averaging
The arithmetic average of all adjusted

prices.
Useful where differences are minor,

but gives equal weight to all sales.
Median Average
Listing adjusted prices from low to high

and choosing the middle figure.
Helpful when range of prices is wide

(i.e., there are some very high or low
sales distorting the mean).
Mode
The figure within an array that appears

most often.
Best when range of prices is narrow

(i.e., chooses most common in a
small distribution).
Weighting
Give more emphasis to the best

comparable(s) and less to the other
comparables.
Maximizes degree of judgment, but is

time-consuming.
6.17
Lesson 6
These reconciliation techniques can give a false impression of precision or objectivity. Using averages such as
the mean, median, or mode may seem to make sense on paper, but in the complex world of real estate they can
be too limiting. For example, you may have researched and adjusted four comparables which indicate a range of
values for the subject property. However, they are not all equally similar to the subject property B i.e., one of
the comparables is "very similar" to the subject, while the others are only "relatively similar". In this case (in
fact, in almost every "real world" case), taking a mathematical average would be inappropriate. It would be
more appropriate to apply greater weight to the value estimate which was more similar to the subject property
and use the others more as guidelines for whether or not this value estimate is appropriate or if it should be
adjusted upwards or downwards. Reconciliation is a subjective decision on the part of the appraiser and it is up
to the appraiser to make a judgment call. The range of decisions which could be acceptable is limitless, AS
LONG AS the decision can be justified by market evidence and the reasoning for the decision is documented in
the appraisal report.
An example of a reconciliation could be as follows:
The adjusted sales prices of three comparable and their gross adjustments are shown below.
Sales Comparables
Final Adjusted Price
Gross (Absolute) Adjustment
#1
#2
#3
$207,000
$211,000
$213,000
$12,000
$8,000
$15,000
Comparable number 2 is the best indication of value because it has the least amount of total
gross adjustments at $8,000. Sales #1 and #3 offer good support as their gross adjustments are
close to comparable #2 and their values, at $207,000 and $213,000, offer good support for sale
#2 at $211,000.
Therefore, the estimated market value of the subject, based on the above analysis, is $211,000
as of the 10th of March, 20__.
Teaching appraisal requires specification of its techniques into what can appear to be regimented lists and
decision rules. However, what gets lost in this documenting process is the fact that appraisal is as much an art as
it is a science.
Properly executed appraisal produces information and analysis that is readily duplicated by other qualified
appraisers. The art entails the application of the appraiser's experience in the analysis of this data. The appraiser
must make decisions based on market knowledge, understanding of the elements of value, and intuition. These
come with experience and cannot be listed or memorized. However, this is not to say that the appraiser can
simply divine value out of thin air. Appraisal is still grounded in science, and the appraiser must be objective and
thorough in both research and analysis. If the appraiser has done their work competently and communicated it
properly, the process should be transparent to the reader of the report, who ought to come to the same opinion of
value as the appraiser.
6.18
Importance of Final Reconciliation

After a long and difficult analysis with innumerable assumptions and calculations made, the final reconciliation is
where the appraiser has their chance to tell their story of value B in their opinion, what is the best estimate of
the subject's value and why? This is the appraiser's opportunity to share their expert knowledge and explain
their informed opinion. Therefore, it is a key part of the appraisal for clients and reviewers!
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The logic should be clear and appear sensible B while the reader does not have to agree, the "story" and
support should be sound.
Averaging of results should NEVER be used! One approach or other is the best estimate of value, not
some arbitrary middle point.
A range of values may be appropriate in some circumstances, depending on the appraisal problem and
the scope of the assignment.
Qualitative Adjustment Techniques
Although quantitative analysis is currently regarded as the primary adjustment technique, it should be recognized
that purchasers do not actually conduct a quantitative analysis, but rather they do a qualitative analysis.
However, the quantitative technique does permit an identification of the probable range of market value because
it considers characteristics that purchasers do value, even if they assign an overall value to a property rather than
individual values to each major characteristic. Consider the first used vehicle that you bought. Before you even
walked out your front door you knew what price range and generally what type of vehicle you were going to
look at. Within these parameters you looked at used vehicles, ideally with a mechanically knowledgeable and
experienced friend (mentor), and noted colour, condition, mileage, engine sound, and how it felt when you sat
behind the wheel. You came away with an overall feel for each vehicle, but you were also likely aware of the
individual major characteristics of each of the vehicles you were comparing, and your mind weighted them
accordingly, possibly consciously but probably subconsciously. After comparing several vehicles, you made your
purchase decision based on an overall gut feel of value. At the moment of purchase you had completed a type of
qualitative adjustment procedure and justified the purchase price by comparing what you paid for your vehicle
with the prices of other comparable vehicles that you surveyed.
If a large enough sample of comparable sold vehicles had been available, the weighting of each of the major
characteristics by a typical purchaser could have been estimated and used to provide a value range for the vehicle
that you eventually purchased (quantitative analysis). Within this data range you could have qualitatively decided
what point value you were prepared to accept in making your purchase offer.
Qualitative analysis is particularly useful when quantitative adjustments involve highly subjective adjustments
such as physical characteristics of view and slope, rather than readily quantifiable adjustment variables such as
market conditions and location.
A problem with the qualitative technique is that when all of the comparable properties are either inferior to or
superior to the subject property, then the heuristic "Rule of 2" cannot be applied and the subject property cannot
be valued using this method. This rule states that in the trial-and-error search for similar utility among unique
comparables, a subject property must fall between at least two of the comparables in terms of its aggregate
utility. In other words, if all of the comparables are either superior or inferior to the subject property, then a
value range cannot be defined. In this case, all that can be said about the value of the subject property is that it is
either less or more than the sale prices of the comparables. However, the quantitative approach does not have
this weakness; hence in this situation quantitative analysis can be the primary valuation technique with the
qualitative technique helping to define the top or bottom of the value range.
6.19
Lesson 6
Qualitative analysis normally involves the following:

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relative comparison analysis;

ranking analysis; and
personal interviews.
Ideally, a properly performed qualitative analysis incorporates all three of the foregoing. First, conduct a relative
comparison analysis. Once this is complete, rank the indices2 according to value, with the subject property
placed in its appropriate position in the array. Reconcile the foregoing to provide a point value estimate for the
subject property.
Qualitative analysis involves the following steps:
1. Thoroughly describe each index.
2. Create a quality table that rates the major attributes of each index as compared to the subject property.
This table does not provide dollar or percentage adjustments, it is purely a qualitative rating as shown in
the example below.
3. Rank the indices according to value and place the subject property in its appropriate position in the
array.
4. Reconcile in order to estimate a point value for the subject property (solicit professional opinions as a
test of this value, if possible).
An example that embodies the qualitative technique, followed by a case study, is provided below.
Example of Qualitative Procedure
The following example illustrates the application of relative comparison and ranking analysis in appraising the
value of a vacant multi-family residential site.
Subject property description The unimproved, triangular-shaped, well-drained, treed-parcel slopes gently
downward from south to north and has an area of 39,732 square feet. It lies above floodplain and does not have
any wetland.
Based on local development, discussions with local builders, and analysis of soil maps, load-bearing capacity of
the soil appears adequate for construction of at least low-rise buildings. The planning department of the local
municipality believes that an application for rezoning to permit low-rise multi-unit residential development (i.e.,
an apartment building) would be supported.
As the site is bounded by three roads and does not share a common lot line with any other property, there is no
plottage value.
Legal access is good from Rosebank Avenue, a dead-end street that defines the southern lot line of the site. The
other two roads are collector roads that offer no access to the site. All municipal services are available on
Rosebank Avenue.
Completion of the "Property Observation Checklist" indicates that there should be no environmental concerns
with the subject property.
The comparable sales are referred to in the rest of this lesson as "indices" because, in actual assignments, other comparison
categories such as offers and listings might be included when there is a scarcity of sales. The term "index", therefore, has an all
encompassing meaning when applied in valuation.
6.20
Indices - All four indices involved conveyance of the fee simple interest, all were arm's length sales, and in all
cases standard market financing was arranged. The indices and their attributes relative to the subject are
summarized as follows:
Subject
Index 1
Index 2
Index 3
Index 4
Conditions of Sale
normal
similar
similar
similar
similar
none
similar
inferior
inferior
similar
$775,000
$405,000
$700,000
$1,225,000
good
poor
fair
good
fair
39,732
43,915
19,008
20,700
35,357
40
40
26
33
51
Floor Space Ratio
1.20
0.57
1.20
1.20
1.90
Square Feet Per Apartment
993
1,098
731
627
695
Location
fair
good
good
good
very good
to be rezoned
superior
superior
similar
superior
Shape
triangle
superior
superior
superior
similar
Access
good
similar
inferior
similar
similar
Price Per Apartment
$19,375
$15,577
$21,212
$24,020
Overall Comparability
inferior
inferior
similar
superior
Expenditures After Purchase

Sale Price
Market Conditions
Lot Size in Square Feet
Apartments Buildable
Use
Each index is analyzed as follows:

Index 1 sold for $19,375 per apartment. Its location, three miles east of the subject property beside a new
shopping plaza in a developing area, is superior to the subject location. Market conditions have changed
positively since the date of sale of Index 1 such that, as at the effective date of appraisal, vacant apartment sites
are selling for considerably more than they were in May, two years ago. Lot size and apartment density are quite
similar to the subject. Index 1 was zoned for apartment use at time of sale whereas the subject site requires
rezoning. Index 1's rectangular shape optimizes use of the site as compared to the triangular shape of the subject
site. Although index 1 is superior in location, zoning, and shape when compared with the subject property, the
significant time appreciation since the date that index 1 was sold results in index 1 being rated inferior, but only
slightly inferior, to the subject property. Therefore, the subject property should have a market value that is
slightly greater than $19,375.
Index 2 sold for $15,577 per apartment. Its location, four miles east of the subject property in a mature
Queenston neighbourhood, is superior to the subject location. Market conditions have changed positively since
the date of sale of Index 2 such that, as at the effective date of appraisal, vacant apartment sites are selling for
slightly more than they were in July one year ago. Index 2 was zoned for apartment use at time of sale whereas
the subject site requires rezoning. Index 2's rectangular shape optimizes use of the site as compared to the
triangular shape of the subject site. Index 2 is inferior to the subject property in three major respects: the vendor
was under financial pressure to sell due to the collapse of a previous offer, the purchaser needed to remove three
dwellings, one of which had some asbestos contamination, and access to Index 2 is difficult for southbound
traffic. As Index 2 only accommodates 26 apartments, the sales period should be shorter than for the subject
property, thereby reducing the Index 2 purchaser/builder's holding cost during marketing. The major negative
Index 2 variables comprising: conditions of sale, expenditures after purchase, and access liabilities, support a
subject market value that is considerably higher than $15,577 per apartment.
6.21
Lesson 6
Index 3 sold for $21,212 per apartment. Its location, four miles east of the subject property in a mature
Queenston neighbourhood, is superior to the subject location. Market conditions have changed positively since
the date of sale of Index 3 such that, as at the effective date of appraisal, vacant apartment sites are selling for
very slightly more than they were in July one year ago. Index 3's rectangular shape optimizes use of the site as
compared to the triangular shape of the subject site. Index 3 accommodates 33 apartments, therefore the sales
period should be shorter than for the subject property, but the slight difference should not result in any major
holding cost savings. As a motel has to be removed from Index 3 in preparation for apartment construction,
Index 3 is inferior to the subject in this respect. Both the subject and Index 3 require rezoning for apartment use.
The fact that Index 3 is a recent sale that also incorporates the same rezoning cost variable as the subject
property is a factor that requires heavy weighting. The variables of location and shape, that are superior to the
subject property, tend to be offset by the cost to remove the motel on Index 3. Therefore, Index 3 supports a
subject market value that is similar to $21,212 per apartment.
Index 4 sold for $24,020 per apartment. Its location, three miles east of the subject property in a developing
Queenston neighbourhood that will provide many of the units with water views, is very superior to the subject
location. Market conditions have changed positively since the date of sale of Index 4 such that, as at the effective
date of appraisal, vacant apartment sites are selling for slightly more than they were in April 15 months ago.
Index 4 accommodates 51 apartments, therefore the sales period should be longer than for the subject property.
Lot size is quite similar to the subject. Index 4 was zoned for apartment use at time of sale whereas the subject
site requires rezoning. Index 4's irregular shape has development drawbacks that are similar to those created by
the triangular shape of the subject site. Considering that, other than for a slight negative market conditions
adjustment and similar size and shape, Index 4 is superior to the subject property, particularly in terms of
location, Index 4 supports a subject market value that is considerably lower than $24,020 per apartment.
Reconciliation - The value indications derived from the indices are reconciled into a single value indication by
arranging the four indices in an array relative to the subject as follows:
Index
Price Per Apartment
$24,020
superior
$21,212
similar
$19,375
slightly inferior
$15,577
inferior
Subject
Considering that Index 1 is only slightly inferior to the subject and that Index 3 is similar to the subject property,
it is reasonable to conclude that the unit value estimate of the subject property lies between $19,375 and $21,212
per apartment and that it likely lies near the top end of this range. Considering the foregoing, the unit value of
the subject property by means of qualitative analysis is estimated to be $21,000 per apartment. Based on this
analysis the estimated market value of the subject site, as of March 20XX, is $840,000 (40 units @ $21,000 per
unit).
6.22
BOX 1
Quality Point
An interesting contemporary development in appraisal is the "Quality Point" (QP) technique. QP is an extension of the
qualitative adjustment techniques shown in this lesson. The QP technique was similarly born out of the belief that
quantitative methods do not accurately portray the behaviour of buyers and sellers in determining real estate value.
QP is also offered as a helpful option for situations where there is not enough data outside of the chosen directly
comparable sales to accurately justify quantitative adjustments.
QP attempts to build upon qualitative techniques by adding more mathematical objectivity to the analysis. The
technique is similar to a relative comparison analysis, but instead of "eyeballing it", the analyst ranks the property
attributes of the sales and subject property on an ordinal scale (e.g., high quality equals 5, average quality 3, poor
quality 1). Weights are then assigned to each attribute as a reflection of their relative importance. In qualitative
analysis, weights are subjectively estimated by the analyst; under QP, a computer is employed to solve for the
optimum set of weights by relating the rated sale attributes to their selling prices. The weighted attribute scores of
each sale and subject are then summed to obtain a single number measure of a property's qualitative utility.
Explained very simply, a "quality point" measure is calculated for each comparable sale. The number of quality points
is related to the sale price, and a sale price per quality point estimate is obtained. A well-fit QP sales comparison
model will reflect sale prices that are proportionate to the number of quality points measured for each sale. The
subject's market value is then estimated by multiplying the comparables' reconciled price per quality point by the
subject's quality point score.
Practitioners have approached the price-quality rating technique of direct comparison in different ways. For example,
some analysts combine traditional quantitative adjustments with QP ratings; others rank the sales to the subject
instead of a relative scale and determine weights through alternative methods. Descriptions of the different
implementations of QP and the mechanics of the calculations go beyond the requirements of this course, but for those
interested, more detailed information for the QP technique can be found under "Quality Point Illustration" on the BUSI
330 "Online Readings" web page.
For the example just covered in this lesson, the subject's total "quality point" score is calculated to be 3.4, compared to
2.9, 2.3, 3.1, and 3.6 for indices 1 to 4, respectively. By relating the selling price per suite of the indices to their quality
point scores and then applying this estimate to the quality point measure of the subject, the market value of the
subject is estimated to be $23,000 per suite (see Note below). This result is similar to that found under the relative
comparison analysis:
Index
Indicated Price Per

Apartment
Overall
Comparability
QP
Score
QP Value Per
Apartment
$24,020
superior
3.6
Subject
3.4
$23,000 (QP)
$21,212
similar
3.1
$21,000 (Qualitative)
$19,375
slightly inferior
2.9
$15,577
inferior
2.3
The "Quality Point Illustration" in the BUSI 330 "Online Readings" shows the calculations in detail, along with more
analysis and background on QP. Students who wish to know more about QP and related price-quality sales
comparison techniques are encouraged to review this online.
*
Note: The set of weights applied to the attribute ratings that gave this result were calculated with linear programming (LP)
software developed specifically for QP by Gene Dilmore, MAI. When the number of attributes exceeds the number of sales,
as in this case study, there exists the possibility of obtaining multiple solutions. This was confirmed when the weights for this
case study were solved using the LP optimizing tool built into a popular spreadsheet program. To manage this constraint, the
analyst may need to use more sales or combine quantitative adjustments with the qualitative ratings.
6.23
Lesson 6
Qualitative Analysis Case Study
This case study applies qualitative analysis to estimate market value of a single family detached dwelling. Indices
1 and 2 are the two sales described on the Sample Market Data Grid earlier in this lesson in the quantitative
analysis section.
The subject property and its three indices are described below.
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Subject Property The owners wish to move to a larger house and are going to sell the subject property
before looking for a new house. They are under no pressure to sell their 1,500 square foot 1-storey
dwelling in very good condition with partly finished basement. It was built in 1984 on a 50 foot by 110
foot level, interior, municipally serviced lot. 1-car attached garage. It is located in the Glenway
neighbourhood.
Index 1 Sold in July for $200,000. Vendors were anxious to sell due to financial difficulties. Purchaser
arranged a standard mortgage of $150,000 through the bank. 1,300 square foot 1-storey dwelling in
good condition with unfinished basement. Built 24 years ago on a 50 foot by 100 foot gently sloping,
interior, municipally serviced lot. 2-car attached garage. It is located in the Marlow neighbourhood.
Index 2 Sold in September for $208,000. Vendor took back a $156,000 mortgage at 1% below bank
rate. 1,400 square foot 1-storey dwelling in good condition with unfinished basement. Built 26 years
ago on a 50 foot by 100 foot gently sloping, interior, municipally serviced lot. 2-car attached garage. It
is located in the Forest neighbourhood.
Index 3 Sold in September for $216,000. Purchaser arranged a standard mortgage of $162,000 through
the bank. 1,700 square foot 1-storey dwelling in very good condition with fully finished basement. Built
15 years ago on a 50 foot by 110 foot level, interior, municipally serviced lot. 1-car attached garage. It
is located in Glenway neighbourhood.
To assist in gaining an overall perspective of the indices in comparison with the subject property, categorizing
the major differences permits the appraiser to build an overall understanding of the quality of each index. These
categories for the above indices are financing terms, conditions of sale, market conditions, location, physical
characteristics of site, and physical characteristics of dwelling. On the following table, if the index is superior to
the subject, a "+" is indicated in the cell, similar "0" and inferior "". If the qualitative difference is significant,
then "++", or "" is shown. Note that in this appraisal situation it is only the following elements of comparison
that should be considered. In a different situation, it may be that different elements of comparison will be
appropriate. Each qualitative analysis situation is different, and you must decide what major elements have to be
analysed in order to provide you with an overall quality picture of each index in comparison with the subject
property.
6.24
Sale Price
Financing Terms
Subject
Index 1
Index 2
Index 3
n/a
$200,000
$208,000
$216,000
standard
Conditions of Sale
normal
Market Conditions
current
Location
Physical Characteristics S Site
Physical Characteristics S Dwelling
Glenway
50'x110' level
1-storey, 1,500 ft
Overall Comparability to subject
Each index is analysed as follows:

C
Index 1 is inferior in five categories, similar in one category, and is not superior in any category. The
vendors were under pressure to sell. The sale took place two months ago and prices have since
increased. The Marlow subdivision is quite inferior to the subject Glenway subdivision. Index 1's
smaller sloping lot is inferior to the subject lot. The house is older, smaller, and inferior in condition to
the subject dwelling, but has a superior 2-car garage. Index 1 is of inferior quality to the subject
property in all categories. Therefore, overall, Index 1 is rated significantly inferior to the subject
property.
Index 2 is inferior in three categories, similar in two, and superior in one. The Forest neighbourhood is
slightly inferior to Glenway. Index 2's smaller sloping lot is inferior to the subject lot. The house is
older, slightly smaller, and inferior in condition to the subject dwelling, but has a superior 2-car garage.
The vendor facilitated the sale slightly by providing the purchaser with a mortgage at an interest rate 1%
below bank rate. It was a current sale with normal conditions of sale. The negative characteristics of
this index, particularly its inferior location and house condition, outweigh its similar and superior
characteristics. Index 2 is rated inferior to the subject property.
Index 3 is inferior in no categories, similar in five, and superior in one. The dwelling on Index 3 is
superior to the subject dwelling because it is larger than the subject dwelling and has a fully finished
basement. In all other respects, Index 3 is quite similar to the subject property. Index 3 is superior to
the subject property.
Armed with the above, the subject property can now be ranked as shown on the following table:
Index
Sale Price
superior
$216,000
inferior
$208,000
significantly inferior
$200,000
Subject
Reconciliation It is evident that the market value of the subject property lies between $208,000 and $216,000.
Now the question is "where in the $208,000 to $216,000 range does the subject property lie"? The previously
completed quantitative analysis may help us. Index 3 is superior in that its dwelling is larger than the subject
property's dwelling and Index 3 has a fully finished basement. The quantitative adjustment for Indices 1 and 2
show that a size difference of 200 square feet has an adjustment value of +$1,500; and the difference in value
6.25
Lesson 6
between an unfinished basement and a partly finished basement is +$2,000. It can be inferred that the difference
between the partly finished basement of the subject and the fully finished basement of Index 3 may also be
+$2,000. If these adjustments are applied to the Index 3 sale price of $216,000, the market value indication
becomes $216,000 ($1,500 + $2,000) = $212,500, which lies approximately mid-way between the sale prices
of Indices 3 and 2.
If quantitative information were not available, then a purely qualitative reconciliation would be required, as
follows. The location and dwelling differences of Index 2 do appear to be more significant than the size and
basement finish gap of Index 3. Location is often the most important factor that influences a purchase decision,
and Index 3 is located in the same neighbourhood as the subject property. Therefore greater weight is accorded
to Index 3, and a market value estimate of $214,000 that is closer to the sale price of Index 3 is appropriate. This
estimate differs slightly from the estimate of $212,500 that resulted from applying quantitative factors in the
previous paragraph, but the difference is so slight that it is insignificant.
If you have doubts about your value estimate, or wish to test it, then ask the opinion of an experienced local real
estate salesperson, several of whom you should be on good terms with as they will provide invaluable aid during
your career.
Refer to the quantitative analysis example in the Sample Market Data Grid earlier in this lesson that indicates a
market value range of $212,100 to $212,200. Considering that sale 2 on that table requires a smaller gross
adjustment than sale 1, it is given greater weight and the market value, estimated quantitatively, is estimated to
be $212,200.3
The market value range of the subject property as indicated by the quantitative and qualitative approaches is
$212,200 to $214,000. Considering that Index 3, with a sale price higher than the value range, is most similar to
the subject property, the top end of the value range is selected. Therefore, market value of the subject property is
estimated to be $214,000.
You now have two different direct comparison analytical tools in your appraisal toolbox. The quantitative
procedure leans towards objectivity (science) whereas the qualitative procedure leans toward subjectivity (art).
You can use one independently of the other, but ideally you should use them together as a crosscheck of their
value estimates. Do not hesitate to test your results by soliciting the opinions of salespeople, property managers,
or appraisers. But remember, in the final analysis, it is your own opinion of market value, properly reasoned and
supported, that you certify and present to your client.
Hybrid Adjustment Technique
The hybrid adjustment technique combines quantitative analysis of three primary variables: market conditions,
location and size; with qualitative analysis of all remaining secondary variables. In most practical situations,
there will be sufficient market evidence to permit the quantitative analysis to support adjustments for time,
location and size. And for what could be a myriad of secondary variables, the normal actions of sellers and
buyers is not to micro-analyze and assign an adjustment amount to each feature or lack thereof. Typically,
buyers will formally, or, more likely, informally, identify the various elements of appeal and lack thereof
associated with house options, and make a bulk decision, covering all these elements, in negotiating for the
purchase of the property. Thus, the hybrid technique recognizes the limitations of the market in providing
identifiable, quantifiable data to support the calculation of the adjustment, and the typical approach taken by
buyers in the market.
Lesson 7 will contain a case study example of the hybrid direct comparison adjustment technique.
2
In practice, a minimum of three comparable sales are required. Only two are used here for illustration.
6.26
Important Cautions in the Application of the Direct Comparison Approach

In applying the direct comparison approach, it is important to pay attention to several cautions.
Causes for Liability Claims Against Appraisers
An analysis of common liability claims as reported in the AICs Professional Practice Seminar include the
following that relate to the application of the direct comparison approach:
1. Time adjustments - when analyzing resales or paired sales to support a time adjustment, it is important
to remember that the pertinent time frame is analyzed from the most dated comparable sale to the
effective date of the report
2. Each approach to value must stand on its own - market-derived adjustments in the land value section of
the report cannot be used in the direct comparison approach, or vice versa.
3. Lump sum adjustments - when applying lump sum dollar adjustments, it is important that the dollar
adjustment amounts are adjusted to the effective date of appraisal.
4. Percentage adjustments - when paired sales are used to justify a percentage adjustment, it is only
necessary to adjust from the date of sale of the more dated sale to that of the more recent sale. To adjust
all comparable sales to the effective date of appraisal is to potentially distort the time-adjusted sale
prices of the comparables, which are then paired to isolate on the adjustment factor being analyzed. It is
only necessary to equate each sale in a pairing to each other due to time, then focus on the other element
of difference.
5. Consistency with unit of comparison - before the adjustment analysis is indicated, it is expected that the
appropriate unit or units of comparison would be supported from the market. The adjustment analysis
must be consistent with the unit of comparison. For example, if square footage is the unit of
comparison, it may not be necessary to calculate an adjustment for size differences if the unit of
comparison inherently addresses this difference.
However, a further caution is warranted. If there is a difference in the unit rate due to economies of
scale, then it may be necessary to determine the economy of scale size adjustment from the market. This
recognizes that larger properties may sell for a smaller unit rate than smaller properties; so the
difference may be attributable to both difference in area or economy of scale. In practice, this presents a
real challenge to appraisers to ensure that they do not, in effect, double adjust -- once via the unit of
comparison, and again by a size adjustment.
6. Reconciliation of adjusted sale prices - the reconciliation of the adjusted sale prices should not rely on
the arithmetic average. Instead, it should provide a rationalized evaluation of the comparables and of the
degree of objectivity and subjectivity in the adjustment analysis, as well as a weighting of the
comparables as indicators of value for the subject.
7. Questionable adjustment support - reliance without verification on the market opinion of hearsay sources
that were not a party to any actual comparable sale can lead to problems. Another common mistake is to
rely on a cost figure without its reconciliation as a market-based adjustment.
6.27
Lesson 6
8. When analyzing power of sale comparables, care must be taken to investigate the impact this has on the
sale price and market value of the comparable. When valuing power of sale properties, the value should
only be discounted if specific market circumstances support such an adjustment. Market evidence of
marketing time needs to be analyzed.
9. When appraising as-if complete properties under construction, renovation or rehabilitation, clearly state
the estimated value is as if complete , if that is the appraisal instruction, wherever the value estimate
appears. Always include the effective date, inspection date and date of report. Identify the estimate of
value as being either current or a prospective value assuming completion.
Treatment of GST or HST
In Canada, the Goods and Services Tax (GST) or Harmonized Sales Tax (HST) may be applied to the sale of
either newly constructed residential improved properties, or those having undergone a major renovation,
modernization or rehabilitation. For these properties, the standard practice is to include the net GST or HST as
part of the sale price when using such sales as comparables. Net GST or HST refers to the amount of the tax that
is paid after taking into account any rebates to the owner. Typically, the GST or HST does not apply to resales
of improved residential properties in Canada. This is the reason that the net GST or HST is included as part of
the sale price for new construction so that they are analyzed on the same basis as resale properties.
This is perhaps best explained by including an excerpt from the Wedley Decision concerning an assessment
appeal in British Columbia. At dispute was whether or not the market value for assessment purposes should
include the GST as part of the market value. This decision was given in 1996.4 This decision reads, in part:
Typically, all commercial properties are treated the same whether new or a resale. They are all subject to the
GST/HST, and therefore, they are analyzed as comparables without including the GST/HST.
It is important that the appraiser investigate and be aware of the GST/HST practice that is followed in the
jurisdiction of their appraisal assignment.
Other Common Errors in the Application of the Direct Comparison Approach
The following is a list of common errors noted by reviewers of appraisal reports, related to the application of the
direct comparison approach.
1. Errors in mathematical calculations, incorrect area calculations.
2. Inadequate explanation of atypical factors, adjustments or analyses.
3. Failure, or reluctance, to ask sensitive questions during the property inspection concerning the need for
major repairs or replacements, or potential contamination.
4. Inconsistencies or contradictions involving trend indicators or adjustments for market conditions.
5. Discrepancies between the photographs of the subject or comparable properties, and the physical
descriptions provided in the report.
6. No explanation or inadequate support for large gross or net adjustments made to comparables.
7. Selection of dated or distant comparables, or comparables that do not bracket the subjects value.
4
Wedley vs Assessor of Area #08 - North Shore/Squamish Valley, Appeal No. 1995-08-00004. Decision number 17215, January 12,
1996.
6.28
8. Failure to recognize or adjust for functional problems evident in the floor plan sketch of the subject.
9. Failure to adjust for personal property that was included in a comparable sale, or mistakenly including
personal property in the subjects appraised value.
10. Failure to report obvious items observed on the subject or comparable properties that are in violation of
current zoning regulations.
The Direct Comparison Approach
Advantages:
C it is generally acceptable by courts and tribunals
C people understand it, and when listing or selling properties, often use it
C when data is available, this is the most straightforward and simple way to explain and support an opinion
of value
C it is a good test of value for all types of properties, provided enough comparables are available
C works well for owner-occupied commercial and industrial properties
Disadvantages:
C sometimes, there are few or no current sales that can be logically used
C comparisons are sometimes difficult, and no two properties are ever exactly alike
C data is always historical and may not accurately predict future imminent, significant upward or downward
trends
C it is often difficult to ascertain all the pertinent information regarding individual sales. This refers
particularly to terms of sale, motivation and so forth.
Frobisher Report
In order to demonstrate the practical application of the direct comparison approach for single-family residential
property appraisals, an excerpt from the Frobisher Report is used. This example provides the comparison and
adjustment tables from the Direct Comparison Approach, some of the adjustment analysis narration, and the
estimate of value concluded from the analysis.
After you have read this excerpt, answer the following questions. The answers can be found at the end of the
Frobisher Report.
1. List at least 10 positive elements of this application of the direct comparison approach.
2. What type of adjustment analysis (quantitative, qualitative or hybrid) has been applied in this example?
Frobisher Report
Direct Comparison Approach
A market search has revealed three recent, comparable property sales that are relevant to the valuation of the
subject property. The following charts provide, first a detailed comparison of the three comparable sales to the
subject property, and second, a summary of the adjustment analysis. This is followed by a narrative analysis
and justification of the adjustments applied.
6.29
Lesson 6
DIRECT COMPARISON APPROACH

Data Comparison Chart
Item
Subject Property
Comparable No. 1
Comparable No. 2
Comparable No. 3
Address
123 Bering Street
137 Bering Street
156 Bering Street
6 Hudson Street
Legal description
Lot 1, Block 2, Plan 1234A
Jan. 3, 2011
Jan. 15, 2010
Nov. 2, 2010
Instrument no.
1234567
1230123
1234111
Registration date
Feb.. 13, 2011
Mar. 29, 2010
Dec. 9, 2010
Vendor
Smith
Rogers
Ranger
Purchaser
Jones
Evans
Tonto
Sale Price
$194,000
$183,000
$186,000
Fee Simple
Fee Simple
Fee Simple
Sale date (contract date)
Rights conveyed
Fee Simple
Financing
Cash to Mortgage
Cash to Mortgage
Cash to Mortgage
Conditions of sale
None
None
None
Expenses made
immediately after purchase
None
None
None
Time difference (mos.)
12.5
Distance from subject

(blocks)
block
block
8 blocks
Location
Good
Good
Good
Good
Bldg size (above grade)
810 sq.ft.
810 sq.ft.
810 sq.ft.
810 sq.ft.
Type/Quality Construction
Good
Good
Good
Good
Energy efficiency
Average
Average
Average
Average
Design and appeal
Good
Good
Good
Good
Age
30 years
31 years
30 years
30 years
Condition
Good
Good
Good
Average/Good
Room Count
Ttl
7
Bds
2
Bth
1
Ttl
7
Bds
2
Bth
1
Ttl
7
Bds
2
Bth
1
Ttl
7
Bds
2
Basement total area
782 sq.ft
782 sq.ft.
782 sq.ft.
782 sq.ft.
Basement/finished below
grade area
567 sq.ft
704 sq.ft.
567 sq.ft
704 sq.ft.
Air conditioning
Central air
Central air
Central air
Central air
Heating
Gas forced air
Gas forced air
Gas forced air
Gas forced air
Bth
1
Fireplace
None
None
One Gas
None
Appliances
None
5 appliances
5 appliances
5 appliances
Lot size
55 x 120 (6,600 sf)
60 x 117.72 (7,064 sq.ft.)
60 x 110 (6,600 sq.ft.)
Irregular (5,598 sq.ft.)
Zoning
R-1
R-1
R-1
R-1
Garage/carport
None
None
None
None
Local Improvement
Charges
None
None
None
None
Shed
One
One
One
One
Days on the Market
N/A
19 Days
27 Days
32 Days
6.30
DIRECT COMPARISON APPROACH (continued)

Adjustment Chart
Item
Comparable no. 1
Comparable no. 2
Comparable no. 3
Sale price
$194,000
$183,000
$186,000
Real property rights conveyed adjustment
Adjusted price
$194,000
$183,000
$186,000
Financing adjustment
Conditions of sale adjustment
Expenses made immediately after purchase adjustment
Adjusted price
$194,000
$183,000
$186,000
Date of sale adjustment
+ .5% = $970
+ 6.25% = $11,438
+ 1.5% = $2,790
Adjusted price
$195,000 (rounded)
$194,400 (rounded)
$188,800 (rounded)
Other adjustments as required:

- Location
- Building size
- Construction
- Energy efficiency
- Design and appeal
-Age
- Condition
+ $5,500
- Room count
- Basement unfinished area
- Basement/finished below grade area
- $4,000
- $4,000
- Air conditioning
- Heating
- Fireplace
- $1,500
- Appliances
- $1,000
- $1,000
- $1,000
- Lot size
- Zoning
- Garage/carport
- Local Improvement Charges
Total Other Adjustments
- $5,000
- $2,500
$ 500
Final Adjusted Sale Price
$190,000
$191,900
$189,300
For reconciliation purposes:
Recent sale; superior

basement finish;
5 appliances;
Dated sale; fireplace;

5 appliances;
Recent sale; inferior

condition; superior
basement finish;
5 appliances;
Total Adjustment
- $ 4,000
+ $ 8,900
+ $ 3,300
Total adjustment as % of Sale Price
2.1%
4.9%
1.8%
6.31
Lesson 6
Sample Comparable Data Sheet [Sample of first comparable only.]
COMPARABLE SALE NO. 1
ADDRESS:
REGISTRATION NO:
DATE OF SALE:
DATE OF REGISTRATION:
CONSIDERATION:
VENDOR:
PURCHASERS:
LEGAL DESCRIPTION:
ZONING:
SITE SIZE:
ROOM COUNT:
HOUSE SIZE:
137 Bering Street

1234567
January 3, 2011
February 13, 2011
$194,000. Cash to Mortgage
Smith
Jones
R-1 Residential, Single Family
60 x 117.72 (7,064 sq.ft.)
7 total rooms, 2 bedrooms, 1 bathroom
810 sq.ft. main, @ 782 sq.ft. basement
DESCRIPTION:
A bi-level style home located on the same street as the subject, just block east, and sold within a month of the
effective date of this report. Built in 1980, it is approximately the same size as the subject, and has the same
floor plan. It has a well developed site like the subject, with a front drive and nicely fenced rear yard. Due to
upgrading it is very similar in overall condition to the subject. The main value-impacting difference is superior
basement development (has a bath in the basement), otherwise it is virtually identical to the subject. Five
appliances were included in the sale price.
6.32
Adjustment Analysis
The order of adjustments applied in this analysis is as follows: property rights, financing, motivation, expenses
made immediately after purchase, market conditions (time), and other.
The subject property and all the comparables, were sold in fee simple, and with similar title encumbrance (rear
utility easement). Financing for all sales is typical of the market. All sales were arms length, and sold through
the open market via local realtors. All comparables, as was the subject, were in average to good condition, well
maintained, with only minimal repair required as of the dates of sale. No adjustments were necessary for
property rights, financing, motivation or expenses made immediately after purchase.
Adjustments for market conditions, or time, are typically necessary when prices change over the passage of
time. The dates of sale for the comparables ranged from 12.5 months to 1 month prior to the effective date of
sale of February 1, 2011. The time adjustment in this report will be supported by three analyses: resales, paired
sales and market statistics.
Two relevant resales of comparable residential property sales were analyzed as follows. There were no
significant changes or improvements to the properties between their two dates of sale.
Property
1 Willing Dr.
16 Able Cr.
Sale Date
May 23, 2007
Mar 31, 2010
Sale Price
$158,400
$189,500
Resale Date
Apr 17, 2010
Nov 28, 2010
Resale Price
$196,000
$195,000
23.7%
2.9%
35 Months
8 Months
.68%
.36%
% Price Difference
No. of Months
% Change/Month
Two sets of paired sales were also analyzed. Again, the four sales used in the pairings were comparable to the
subject, and highly similar to each other in the pairings.
Paired Set
Sale Price
Sale Date
137 Bering St.
$194,000
Jan 3, 2011
131 Bering St.
$180,000
Nov 5, 2009
127 Bering St.
$196,000
Apr 17, 2010
117 Marsh
Ave.
$176,000
May 25,
2008
%Price
Difference
Number of
Months
Percentage
Change/Month
7.8%
14
.56%
11.4%
23
.5%
6.33
Lesson 6
Thirdly, general statistics on average residential sale prices provided by the Saskatoon Real Estate Board were
reviewed.
Year
No. of Sales
Avg. Sale Price
% Change/YR
% Change/MO
2008
1096
$119,914
2009
1128
$143,232
19.5%
1.6%
2010
1102
$161,338
12.6%
1.05%
Each analysis indicates that residential real estate prices have been rising over the past two years. The period
for adjustment ranges from the most dated comparable sale to the effective date of appraisal, that is, January
15, 2010 to February 1, 2011. None of the data sets covers this exact period.
Dealing first with the time adjustment indication provided by the Real Estate Boards statistics, while they are
useful to support the direction of a time adjustment, they do not provide the best evidence of the amount of time
adjustment. The statistics are based on residential property types throughout the entire Saskatoon area. So,
while they are supportive of an increase in values, they are less useful in indicating the amount of time
adjustment than the other indicators.
The resales indicate a time adjustment of +0.36% and +0.68% per month. The paired sales indicate +0.5% and
+0.56% per month. These are fairly consistent. Both the resales and the paired sales indications of a time
adjustment are based on highly comparable sales in the immediate, and nearby comparable, area of the subject
property. Three of the sales used in the paired sales analysis are on the same street as the subject property,
and one is further analyzed as comparable number 1. Therefore, most weight has been given to the time
adjustment indicators provided by an analysis of resales and paired sales, which indicate a time adjustment of
+0.5% per month. This has been applied in the adjustment chart.
Comparable sale 3 was inferior to the subject with respect to condition. It has been well maintained, but has the
original exterior doors and windows and this lowers the overall condition of the property in comparison to the
subject. An adjustment is required to reflect the upgrading of the subject property for these building
components. Two sets of paired sales were analyzed. It was possible to find two sets of properties that were
similar to one another in all value-impacting aspects, with the exception of time and condition (window and
exterior door upgrading). Since a time adjustment of +0.5% per month has been supported with market
evidence, this can be applied to the sales to equate them for time, and all the difference of window/door
upgrades to be examined.
In each pairing, the more dated sale was adjusted to the date of the more recent sale using an adjustment of
+.05% per month.
6.34
Paired Set
Sale Price
Sale Date
Time Adj. Price
143 Baffin Dr.
$178,000
July 1, 2009
$190,460
149 Baffin Dr.
$196,000
Sep 3, 2010
$196,100
156 Baffin Dr.
$181,000
Nov. 7, 2009
$191,860
$185,5000
Nov. 11,
2010
$185,500
6 Churchill St.
$ Difference
$5,640
$5,360
Based upon the analysis of these two sets of paired sales, the adjustment required to reflect upgraded windows
and exterior doors is estimated at $5,500.
Adjustments for basement finish at $4,000 and fireplace at $1,500 were derived from market data and applied in
the adjustment chart. The adjustment for appliances was based upon interviews with agents, sellers and buyers.
Comparable sale 1 is a good example. Originally, the appliances were not included in the asking price of the
property. The owner wanted to keep them, unless a fair price was offered for them. The listing agent advised
that the owner would have taken $1,000 less for the house, and kept the appliances. Also, there is good
demand for used appliances, selling at approximately $200-$300 each. An adjustment of $1,000 was made to
reflect the contributory value of the appliances to the sale price.
Reconciliation and Estimate of Value
The range of adjusted sale prices for the comparables is quite narrow, ranging from $189,300 to $191,900. The
best comparable, with an indicated, adjusted value of $190,000, was comparable number one, as it required the
least adjustments. Before adjustments, the comparable sale prices ranged from $183,000 to $194,000. The
adjustment process relied upon market-derived adjustments, and total adjustments ranged from 1.8% to 4.9% of
the sale prices.
Comparable 1 is the best of the three sales. It is the most recent sale, occurring only one month prior to the
effective date of appraisal. It required the least adjustments. Sale 2 is also highly similar, but is the most dated
sale and required a very large time adjustment. Sale 3 was the only sale that needed an adjustment for
condition (need to upgrade windows and exterior doors), but was otherwise very comparable as well.
Giving most consideration to Sale 1, but strongly supported by sales 2 and 3, the market value of the subject
property estimated via the direct comparison approach is $190,000, as of March 20XX
6.35
Lesson 6
Answers to Questions
The positive elements of this application of the direct comparison approach include:
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
The final value estimate of the subject is bracketed by the actual sale prices of the comparables.
The final value estimate of the subject is bracketed by the adjusted sale prices of the comparables.
The indicated range of values for the subject property is narrower after the adjustment process.
Three separate techniques are used to justify the market conditions (time) adjustment.
A narrative market analysis leads the reader through the appraisers thinking process and rationalization
of conclusions/opinions.
All significant adjustments are market derived, from an analysis of comparable sales.
Even the relatively minor adjustment for appliances was explained.
Tables were clear and to the point, and data sheets on the comparables provided good back-up.
Adjustments were applied in the correct order.
A reasoned reconciliation was presented to explain the final estimate of value.
Data and techniques were evaluated by the appraiser, rather than simply relying on mathematical
averages.
The analysis appears to account for all potentially value-impacting characteristics of the subject and
comparable properties.
Comparable properties are adjusted to the subject property.
Elements of the comparables that are superior are given downward (negative) adjustments, and
components that are inferior are given upward (positive) adjustments.
When pairing sales in support of an adjustment (e.g., condition), the most dated sale is appropriately
adjusted first for time to the date of the most recent sale, rather than adjusting both to the effective date
of appraisal.
Even though more data could have been given on each of the comparables used in the resales and paired
sales analysis to establish their comparability to each other except for the component being analyzed, the
analysis at least states this to be the case.
This example applies the quantitative adjustment method, whereby all adjustments are quantified and supported
by market analysis.
Summary
Lesson 6 completes the direct comparison approach by further explaining and illustrating the quantitative,
qualitative and hybrid techniques of analyzing comparable sales and adjusting them to give an indication of value
for the subject property. The advantages and disadvantages of the direct comparison approach are described. The
Frobisher report provides a practical example of the application of the direct comparison approach for the subject
single-family residential property.
6.36
Review and Discussion Questions

1.
You are appraising a home that has no garage. One of your best comparables has a garage and sold 6
months ago. Since then the market conditions have increased by 5%. Show the process of how you
would make the comparable similar to the subject and provide your rationale for any adjustment you
recommend. Use data of your own choosing to illustrate your answer.
2.
You have developed the following adjustment chart for a residence, using three comparables. Assume
that market conditions have caused prices to increase by 8% over the previous year. Half rooms
contribute $8,000 to value.
Draw a similar chart showing plus and minus dollar adjustments. What is the indicated value of the
subject property? Note: In reconciling your value estimate, you must make it clear to the reader (or the
marker) what your underlying reasoning was for your decisions.
1
Subject
Price
$180,000
$186,000
$175,000
Date
current
1 year ago
6 months ago
current
equal
equal
$3,000 less
62
$4,000 less
$6,000 more
equal
Site value
Rooms
Condition compared to subject
3.
62
You are appraising a 25 year old bungalow with an attached garage on a standard size lot. It has a
finished recreation room which adds about $2,500 to its value; the kitchen has recently been modernized
at a cost of $8,000, although it is estimated to only add $5,000 to value. It still has an old original
furnace which would cost about $3,000 to replace with a modern forced-air unit, and it is expected that
this alteration would increase the value by $2,000. Properties similar to the subject and to the following
sales are now selling for approximately $6,000 more than last year.
You have completed your sales analysis and have selected the following three sales as being the most
comparable:
Sale 1
This bungalow with an attached garage sold a year ago for $139,500. Its age, condition, construction,
design, and lot size was similar to the subject. It was located in a better area requiring an adjustment of
$3,000. It has been modernized throughout, including the furnace and kitchen, and it has a finished
recreation room.
Sale 2
Sold about the same time last year for $133,000. It was in the same location as the subject and has a
similar lot size. Its condition was superior to the subject by $4,000, but its age, construction, and design
were similar. It was heated by a modern forced hot air unit and it had an attached garage, which was
added prior to the sale at a cost of $6,000 (however, homes with an attached garage usually sell for only
an extra $4,000). It had no recreation room and its original kitchen would be considered functionally
obsolete in terms of today's standards.
6.37
Lesson 6
Sale 3
Sold one month ago for $135,000. It was in the same location as the subject. It had a private drive, but
no garage. The kitchen had been modernized and a recreation room finished, but it too had an old
furnace that needed replacement.
Prepare a sales adjustment chart, complete a reconciliation, and estimate the market value of the subject
property.
4.
5.
Thomas, an appraiser of single family homes, has been asked to calculate the financing adjustment on a
comparable sale. The property sold last month for $150,000, with a down payment of $37,500, and a
mortgage for the balance. The mortgage was written at an interest rate of j2 = 8% (annual interest rate
with semi-annual compounding) for a 25 year amortization period and monthly payments (paid in
arrears) over a 5 year term. The market rate at the time of sale was j2 = 9%. [NOTE: this question is
provided for practice and illustration purposes only; this topic will NOT be tested on the final exam in
this course]
(a)
Calculate the payments and outstanding balance of this mortgage.
(b)
Calculate the financing adjustment.
(c)
What is the adjusted sale price of this comparable? Explain why the adjustment increases or
decreases the original sale price.
The following data presents information on six sales that an appraiser considers comparable to the
single-family residence being appraised.
Subject
Sale 1
Sale 2
Sale 3
Sale 4
Sale 5
Sale 6
__________________________________________________________________
Price
Date
Size (sq.ft.)
Location
Age
Basement
6.38
Current
2,000
5 years
Yes
$75,000
Current
2,000
Similar
5 years
No
$74,000
1 yr old
2,000
Similar
5 years
No
$70,000
Current
1,500
Similar
5 years
No
$80,000
1 yr old
2,000
Superior
5 years
No
$82,000
Current
2,000
Similar
New
Yes
$79,000
Current
1,500
Superior
5 years
Yes
(a)
Calculate the appropriate adjustments for the variables listed.

Hint: calculate the adjustment for market conditions using percentages and all other adjustments
using dollar figures.
(b)
Create an adjustment grid for the comparable sales.
(c)
Derive a value indication for the subject property.
6.
You have been asked to value a small owner-occupied retail property for mortgage financing purposes.
Five buildings have sold recently that you feel can be considered as comparables. For each of the sales,
charted below, determine whether the net adjustments will be positive or negative. Explain your
findings, referring to the sale price per sq. ft. of building area and how this would apply to the area of
the subject building. Based on your findings, what would the approximate value be of the subject
property?
Note: the reason for referring to price per sq. ft. (or per square metre) is that this takes into account
variations in building size which otherwise become more subjective adjustments. It is still important to
think about the effect that the size of a building has on the overall value, however, as there is usually an
optimum size, with a great variation from this having an effect on value.
Element of
Comparison Subject
Sale A
Sale B
Sale C
Sale D
Sale E
_________________________________________________________________________________
Sale Price:
$235,000
$245,000
$255,000
$248,000
Property
Interest
fee simple
fee simple
fee simple
fee simple
fee simple
fee simple
Age:
4 years
6 years
5 years
4 years
5 years
4 years
2,500
2,450
2,250
2,450
2,550
Gross Building
Area (sq.ft.)
2,500
Construction
& Condition
average
average
average
above
average
above
average
average
Parking
Capacity
average
below
average
below
average
above
average
average
average
superior
inferior
similar
superior
inferior
Location:
7.
$250,000
Perform a qualitative analysis from the information provided in question 3. Assume that rights
conveyed, financing terms, conditions of sale, lot characteristics, and expenditures made immediately
after purchase are similar for the subject property and the indices. Provide your rationale.
6.39
Lesson 6
8.
Basedon the following market information, estimate the market value of the subject property as of
December 1, 20__ using the direct comparison approach.
Subject Property
A single-family two-storey house located in the City of Vernon. The house contains 1,600 square feet
with 4 bedrooms and 2 full baths on a lot with the dimensions of 60' H 120'. The structure is 60 years
old and is in generally good condition except for the roof, which must be replaced at a cost of $5,000.
Prospective Comparables
All comparable sales are located in the same neighbourhood as the subject property. They are in similar
condition as the subject except none of the comparables needs a new roof. A review of their titles and
liens indicates that none of the comparables were non-arms-length transactions or had non-market
financing.
Sale #1
______________
Sale Price:
Date of Sale:
Lot Size:
Livable Area:
Bedrooms:
Bathrooms:
$146,000
August 1, 20__
60' H 120'
1,460 sq. ft.
2
1
Sale #2
______________
Sale Price:
Date of Sale:
Lot Size:
Livable Area:
Bedrooms:
Bathrooms:
Sale #3
______________
Sale Price:
Date of Sale:
Lot Size:
Livable Area:
Bedrooms:
Bathrooms:
$155,000
September 1, 20__
60' H 120'
1,275 sq. ft.
3
3
$176,000
March 1, 20__
60' H 120'
1,800 sq. ft.
4
3
Sale #4
______________
Sale Price:
Dale of Sale:
Lot Size:
Livable Area:
Bedrooms:
Bathrooms:
$172,000
November 1, 20__
60' H 120'
1,650 sq. ft.
4
2
Sale #5
______________
Sale Price:
Date of Sale:
Lot Size:
Livable Area:
Bedrooms:
Bathrooms:
$161,300
October 1, 20__
48' H 110'
1,400 sq. ft.
3
2
General Information
An analysis of housing prices in Vernon suggests that during 20__, market values rose during the first
half of the year at a simple monthly rate of 1%, then rose over the second half at the simple rate of .5%
per month. Also, market data indicates that in the range of 1,000 to 1,800 square feet of livable area,
each incremental square foot adds $40 to the market value of a house. Further, the additional value of
extra bedrooms and bathrooms is approximately $10,000 per bedroom and $8,000 per full bathroom.
6.40
ASSIGNMENT 6
Chapter 15: Applications of the Direct Comparison Approach
Marks: 1 mark per question.

1.
The direct comparison approach requires how many comparables?

(1)
(2)
(3)
(4)
3
5
7
There is no set minimum.
THE FOLLOWING FOUR (4) QUESTIONS ARE BASED ON THE FOLLOWING:
The subject property is a small commercial building in a small town. It contains 4,000 square feet of
gross building area and was constructed 10 years ago. It has an unfinished basement. The seller has
agreed to provide a financing package that provides $4,000 in financial benefits. Examination of the
market has revealed several sales of competitive properties. It appears that prices in the market are
increasing at about 5% per year, on a straight-line basis. A market analysis has indicated that a
basement adds approximately $11,000 to the value of commercial buildings ranging in size from 2,500
to 5,000 square feet.
C
C
C
2.
What are the adjustments with respect to financing to Comparables 1, 2 and 3, respectively?
(1)
(2)
(3)
(4)
3.
Comparable 1 has 2,800 square feet of building area. It also has a finished basement. It was sold
approximately one year ago for $275,000, at financing terms that are typical of the market.
Comparable 2 has 3,000 square feet of building area, without a basement. It sold one year ago for
$280,000 for a financing package similar to that of the subject
Comparable 3 has 3,000 square feet of building area. It also has a finished basement. It sold three
days ago for $300,000 at terms that are typical in the market.
$0, $0, $0
+$4,000, +$4,000, +$4,000
+$4,000, 0, +$4,000
-$4,000, 0, -$4,000
What are the adjustments with respect to the basement to Comparables 1, 2 and 3, respectively?
(1)
(2)
(3)
(4)
+$11,000, +$11,000, +$11,000

0, +$11,000, 0
-$11,000, 0, -$11,000
0, -$11,000, 0
***Assignment 6 continued on the following page***
6.41
Lesson 6
4.
Which sales should be adjusted for market conditions?

(1)
(2)
(3)
(4)
5.
Comparables 1 and 2.
None of the comparables.
What would be the correct order of applying adjustments?

(1)
(2)
(3)
(4)
Order does not matter.

Market conditions, basement, financing.
Basement, financing, market conditions.
Financing, market conditions, basement.
THE FOLLOWING FIVE (5) QUESTIONS ARE BASED ON THE FOLLOWING CASE STUDY:
In estimating the market value of a single family dwelling, you analyze 12 sales and list the following features
with respect to each property.
SALE NO.
SALE DATE
SALE PRICE
REMARKS and COMPARABILITY
current
$139,400
comparable to subject except that the sale

has central air conditioning
One year ago
$136,100
similar to Sale 1
6 months ago
$137,700
similar to Sale 2
current
$134,900
similar to Sale 1 except in a poorer

location
current
$135,200
similar to Sale 4
current
$145,300
similar to Sale 1 except it has a detached

garage whereas Sale 1 has no garage
6 months ago
$143,600
similar to Sale 6
current
$132,900
similar to Sale 1, except it has wood siding

and Sale 1 has brick
current
$133,000
similar to Sale 8
10
current
$136,600
similar to Sale 1, except that it has no

central air
11
current
$136,600
similar to Sale 10
12
One year ago
$135,550
similar to Sale 6, except it has frame siding

instead of brick
6.42
Using two sets of paired sales analysis, answer the following five questions. Hint: for instance, when trying to
find the adjustment for air conditioning, you need to find a sale with air conditioning and one without. The
difference between the two comparables should indicate the market value of the air conditioning. For each
adjustment, two or more sets of pairings should be used to support your findings as one set of pairings may not
be a true example of market behavior.
6.
What is the annual percentage change to be used for the market condition adjustment?
(1)
(2)
(3)
(4)
7.
What is the dollar adjustment for air conditioning?

(1)
(2)
(3)
(4)
8.
+$6,000
-$6,500
+$6,500
-$6,900
A property with a poorer location has to be adjusted how much in relation to better located properties?
(1)
(2)
(3)
(4)
10.
$2,500
$2,600
$2,800
$2,900
Assuming that homes with wood siding are considered inferior to brick finished homes, what adjustment
would be necessary for the presence of wood siding in a comparable?
(1)
(2)
(3)
(4)
9.
1.2%
2.2%
2.4%
3.6%
-$4,350
+$4,100
+$4,350
+$4,600
Detached garages are worth approximately:

(1)
(2)
(3)
(4)
$5,000.
$5,600.
$5,900.
$6,000.
6.43
Lesson 6
The property being appraised is a 10-year old warehouse containing 30,000 square feet of gross building area
and 3,000 square feet of finished office area. The ceiling height is 18 feet. The quality of construction is good
and the building's condition is average.
The five comparables described in the table below were used in the analysis. All of the comparables are
warehouses located in the subject property's market area.
Comparable
Subject
$700,000
$600,000
$820,000
$800,000
$590,000
31,000
28,000
32,000
33,000
30,000
30,000
Above-mkt
lease
Below-mkt
lease
Normal
Normal
Normal
Normal
Sale Date
Current
6 months
ago
9 months
ago
Current
9 months
ago
Condition
Excellent
Average
Average
Poor
Average
Average
No
No
Yes
Yes
No
No
Price
Area in square feet
Property Rights
Beneficial Financing
Below is further information on the properties' attributes and the necessary quantitative adjustments:
Property Rights Conveyed
Sales A and B were sold subject to long-term leases, so both require an adjustment for property rights conveyed.
Sale A requires an adjustment of $29,000 because it is leased at an above-market contract rent.
Sale B requires an adjustment of $30,000 because it is leased at a below-market contract rent.
All comparables were arm's-length transactions.
Market Conditions
The sales occurred over a 12-month period. Properties in this market have been appreciating at 6% annually or
0.5% per month (assume a simple, non-compounding rate). Sale B occurred six months ago, while Sales C and
E occurred 9 months ago. Sales A and D are current sales.
Financing
The vendor of Sale D provided advantageous financing that resulted in the buyer paying $45,000 more than the
buyer would have paid in a cash transaction. The buyer of Sale C assumed an existing, below-market loan and
therefore paid a premium of $5,000 above the price that would have been paid under market terms. The other
sales were paid in cash.
6.44
Condition of Improvements
Sales B, C, and E all had building conditions that were average. Sale A had no deferred maintenance and was in
excellent condition. An adjustment of $8,000 is required to bring it in line with the subject's average condition.
Sale D suffered from excessive deferred maintenance. At the time of sale, the buyer anticipated spending
$28,000 upgrading the building to average condition.
11.
What is the property rights adjustment for Sale B?

(1)
(2)
(3)
(4)
12.
Based only on the quantitative adjustments outlined above, what is the net adjusted price per square foot
for Sale C?
(1)
(2)
(3)
(4)
13.
$22.03
$23.73
$24.76
$26.45
What is the necessary adjustment for market conditions for Sale E?

(1)
(2)
(3)
(4)
15.
$20.25
$22.50
$22.59
$26.61
Based only on the quantitative adjustments outlined above, what is the net adjusted price per square foot
for Sale D?
(1)
(2)
(3)
(4)
14.
!$30,000
!$29,000
+$29,000
+$30,000
- 6%
- 4.5%
+ 4.5%
+ 6%
If the quantitative analysis of these comparables showed a range of $20.55 to $26.61 per square foot,
which of the following would be the most reasonable point estimate of total sale price for the subject
property?
(1)
(2)
(3)
(4)
$875,000
$800,000
$675,000
$550,000
6.45
Lesson 6
The property being appraised is an 8-year old warehouse containing 20,000 square feet of gross building area
and 1,500 square feet of finished office area. The ceiling height is 18 feet. Both the quality of construction and
the building's condition are good.
A senior appraiser has performed the appropriate quantitative adjustments to the comparable properties to
account for differences in property rights, financing, conditions of sale, market conditions, and deferred
maintenance. The senior appraiser has assigned the rest of the project to you, and you must conduct a qualitative
analysis to finalize the appraisal.
The five comparables described in the table below were used in the analysis. All of the comparables are
warehouses located in the subject property's market area.
Subject
Sale 1
Sale 2
Sale 3
Sale 4
Sale 5
$24.09
$23.86
$27.84
$26.91
$25.38
good
excellent
good
excellent
good
poor
8 years
8 years
12 years
6 years
8 years
5 years
18 ft.
17 ft.
18 ft.
18 ft.
19 ft.
18 ft.
Adjusted price per square foot

Construction quality
Age
Ceiling height
16.
Which of the comparable sales would most likely be considered superior to the subject property?
(1)
(2)
(3)
(4)
17.
Sales 1 and 3.
Sales 3 and 4.
Sales 1, 3, and 4.
Sales 3, 4, and 5.
After performing all qualitative adjustments, Sale 1 would most likely be considered _________ to the
subject property?
(1)
(2)
(3)
(4)
inferior
similar
superior
impossible to determine
6.46
18.
After performing all qualitative adjustments, Sale 2 would most likely be considered ___________ to
the subject property?
(1)
(2)
(3)
(4)
19.
After performing all qualitative adjustments, Sale 3 would most likely be considered _________ to the
subject property?
(1)
(2)
(3)
(4)
20.
inferior
similar
superior
Based on the qualitative analysis, which of the following is the most reasonable estimate for a price per
square foot for the subject property?
(1)
(2)
(3)
(4)
20
inferior
similar
superior
$24.00
$24.75
$25.73
$26.00
Total Marks
PLANNING AHEAD
You should continue to think about your plans for Project 2 and should be doing as much research as you can
well in advance for this project. Do not leave this until the last minute, or you will be scrambling at the due date
and will likely not be pleased with the work you submit. The quality of your work on this assignment will directly
reflect the time and effort put into the research and analysis effort.
***End of Assignment 6***
6.47

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LESSON 6

The Direct Comparison Approach Part II

Evaluate comparables for similarity to the subject property.

The Direct Comparison Approach Part II

Property rights greater or less than subject are first.

Favourable financing distorts original price (Dollar).

Conditions of Sale (Motivation)

Undue pressure at time of sale lowers price (Dollar).

Expenditures Made Immediately

Monies to be spent by the purchaser to make it usable for their

Market Conditions (Time)

Reflects changes in market over time (Percentage).

The impact on price because of different locations; in effect, this is

Differences in size, age, condition, etc. (Dollar).

Aspects of a property that affect its net operating income.

Factors that result in differing property utility, arising from factors

10. Non-Realty Items

Personal items, business concerns, or other items that do not involve

Real Property Rights Conveyed

Note that this type of calculation is not

Illustration of Adjustment for Financing

The Direct Comparison Approach Part II

Entered stated nominal rate

Entered stated compounded frequency

Compute equivalent effective annual rate

Enter desired compounding frequency

Nominal contract rate with monthly compounding

Actual loan amount

Enter amortization period in months

Actual (rounded) payments

Outstanding balance after 60th payment

Entered stated nominal rate

Entered stated compounded frequency

Compute equivalent effective annual rate

Enter desired compounding frequency

Nominal market rate with monthly compounding

Enter contract term in months

OSB to be received at the end of the term

Market value of payment stream over the loan term

Adjustment required = 25,000 - 24,099.26 = $900.74

Entered stated nominal rate

Entered stated compounded frequency

Compute equivalent effective annual rate

Enter desired compounding frequency

Nominal contract rate with monthly compounding

Actual loan amount

Enter amortization period in months

Actual (rounded) payments

Outstanding balance after 60th payment

Calculate extra payments:

240.64 ! 223.63 = 17.01

23,692.0758866 ! 23,497.3372375 = 194.7386491

The Direct Comparison Approach Part II

Entered contract term in months

Extra outstanding balance at end of term

Market value of payment stream over loan term

The adjustment required is $900.74.

It is important to clearly establish the date of

The following data will be used to illustrate paired sales

or -$8.67/month/m (-$.81/month/sq. ft.)

The Direct Comparison Approach Part II

Adjustment is for a period of 6 months.