Estimating Value Using the Sales Comparison Approach

Instructor: Traci Cull
Sales comparison approach is one method for valuing a property before listing it for sale. But how do you take into account all the different factors of comparable properties? This lesson goes over the different types of market multipliers, including PGIM, EGIM, NIM and cap rate.

Sales Comparison Approach

Becky has a commercial property building that she wants to list for sale. She wants to have a valid fair market value for her property and has hired Bob, an appraiser, to help her.

Bob uses the sales comparison approach, in other words, he looks to see if there are any recent comparable sales for that type of property in the local area. He has found a few other commercial properties that have sold recently, so he goes through and finds their similarities and differences. He must also make sure that they are recent sales, that the economy has not shifted drastically, and that the conditions of the sale and area are similar.

Bob can figure out a market value for what each sold for and how many square feet each had. This would give him a reasonable value per square foot for each property. But simply looking at the value per square foot or value per unit has a lot of pitfalls. Bob could come up with $100 a square foot for Becky's property, but though this is a 'reasonable' value, it doesn't take many things into consideration.

Market Multipliers

Using market multipliers can take into account the many differences in properties. The more 'identical' properties Bob can find the better. For example, if one comparable property is quite a bit older than Becky's, if one has more modern design elements or uses a unique property material over Becky's property, all those details will adjust the actual value.

Another thing Bob must look at is the location of the comparable property, which is key. If an area is booming economically, then it will most likely have a higher value than one in a less busy area.

Bob must also look to the use of the properties. Are both the comparable properties being used to their highest and best possible use? If a property can be used in a much higher way and is not, that will affect the value placed on it.

Market Multiplier Types

Now, after looking at the differences and how those can affect a market value, we can look to the different market multipliers.

Potential Gross Income Multiplier

A potential gross income multiplier (PGIM) looks to the relationship between the actual sales price of a property and the potential total income that is achievable for it.

PGIM = market price / potential gross income

To get the PGI, let's look at potential gross income + any other income (like parking fees, vending machine income, etc.) Let's use Becky's property and a comparable property:

Comparable Property:

Income Amount
Market rent (annually) $12,000
Other income (vending, etc.) $1,000
PGI $13,000

PGIM = Market price of comp property / PGI
$150,000 / 13,000 = 11.54

The PGIM multiplier is 11.54, which means the sales price of the comparable property is 11.54 times greater than the potential gross income of the property.

Effective Gross Income Multiplier

Now let's try the effective gross income multiplier (EGIM), which looks to the relationship between the sales price of the property, annual income achieved, and takes into account things such as vacancies and collections. So, let's do the EGIM for the same comparable property:

Income Amount
Market rent (annually) $12,000
Vacancies and bad debt additions (estimate 10%) -$1,200
Other income (vending, parking, etc.) $1,000
EGI $11,800

EGIM = Market price of comparable property / EGI
$150,000 / 11,800 = 12.71

The EGIM multiplier is 12.71, which means the sales price of the comparable property is 12.71 times greater than the potential gross income of the property.

Net Income and Cap Rate

Two other multipliers are the net income multiplier and cap rate.

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