Qualitative Adjustments of Real Estate Sales Comparisons

Instructor: Traci Cull
Property appraisers use qualitative adjustments to find valuations for property. These qualitative adjustments are subjective and use different methods to estimate the property value. This lesson will go over these methods.

The Sales Comparison Approach

Have you ever wondered how a property's sales price is determined? Why is one particular house more expensive than the one right next to it? In real estate, there are different ways appraisers can reach a sales price including quantitative and qualitative adjustments. This includes the sales comparison approach.

Since no two properties are exactly alike, different methods are used to adjust the prices of sold or comparable property. When assessing value, it is important to look at many aspects including; utility, scarcity, salability, purchasing power, and desire.

The sales comparison approach determines the market value of a property by making adjustments to the sales price after comparing with similar properties.

Comparables include property that are similar in physical aspects, present economic conditions, dates of sale, and even competitiveness in the market. Attributes can be either quantitative or qualitative.

Qualitative attributes most often represent demand in that they measure utility and are based on predefined categories. If an adjustment is not supportable with a specific dollar amount, then qualitative adjustments would be easier to justify.

Advantages and Disadvantages

Quantitative analysis is objective and often referred to as more precise and scientific than qualitative. However, there are often many inefficiencies in the real estate market and therefore difficulty in expressing valuation adjustments with mathematical precision.

Qualitative analysis uses trends, comparisons, and ranking to explain the value indications and is purely relative. Since it is often difficult to verify specific quantitative adjustments, the subjective nature of these qualitative analyses come in handy.

Some of those qualitative types of analysis are as follows:

Trend Analysis

Trend analysis is a technique that identifies and uses trends to adjust property values based on the desirability of certain characteristics and amenities. There are many trends that can affect a property's value:

  • Is a property located in an up and coming area of town?
  • Does it have a pool or health club?
  • What are the property tax rates?
  • Is the property located in a good school district?
  • How close is the property to shopping?
  • Is the property close to public transportation?
  • What is the crime rate for that location?

Trend analysis is usually more of a quantitative adjustment since it measures trends in the marketplace, however, when obvious trends are not present, it can be used in a qualitative way. An appraiser can look through different property characteristics and market conditions to find relationships between sales prices. This can be useful if there is not a lot of comparable data to use. If an appraiser cannot find a lot of similar property sold recently, they can use this analysis to formulate an approximate value using overall trends.

Relative Comparison

Another technique available to value a property is relative comparison.

Qualitative analysis and relative comparison use quality ratings to compare the subjected property to comparable properties and decide if each is superior (+), inferior (-), or equal to (=) the property in question.

Real estate agents are quite knowledgeable about what buyers are looking for and what features they want. This valuation is very similar to what an actual appraiser does, however, there are no actual dollar amounts used - it's more of an overall view.

For example, say one property has eight net positive features over the six of the other property, and therefore is more desirable. This may be why, when you look at multiple houses or properties, one is more expensive than another. Even houses in the same neighborhood that look almost identical can sometimes have differing features that may place a more positive or negative value on the price.

Make sure to assess every attribute that is different and similar with comparable properties. The properties must not only be similar in attributes and close in proximity, but also, comparable sales must be recent. There are different characteristics that can be compared including:

  • Location, age, and size of the building
  • Square footage
  • Layout of the property
  • Date of sale
  • Type of construction
  • Condition of property
  • Zoning
  • Topography
  • Utilities

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