Commercial Real Estate Encyclopedia

Valuation and Financial Analysis >> Comparable Property Sales and Market Value

Estimate Of Value - Comparable Real Estate Sales

What are Comparable Sales in Real Estate

One technique used to arrive at an opinion of a property's market value is to compare the subject property to other similar properties that have recently sold in the same or similar market. This is known as the Sales Comparison, Market Comparison, or Market Data approach to estimating a property's market value.

The Comparable Sales method is commonly used, especially among the commercial real estate brokerage profession. The advantage of this approach is it can provide a good indication of what price a property's may actually attain in a given market.

The same approach also applies to determining commercial lease rates. The difference is where sales data is generally a matter of public record, commercial lease transactions are not.

Caveats

There are certain caveats when using comparable real estate sales to estimate a commercial property's price on the real estate market.

The market from which sales will be selected must be the same as the market for the subject property. Factors to consider include property location, property attributes, financing, sale terms, lease characteristics, and tenant type.

There must also be enough recent market activity to provide sufficient sales that could be considered similar enough to the subject property. Sparse and scattered sales that have not occurred recently will not give an accurate indication of current market conditions.

Conversely, some real estate markets may be dynamic and change rapidly due do economic conditions or other supply and demand factors. Under these market conditions, even recent sales or leases of similar commercial properties may be unreliable. An onslaught of inventory, excess or lack of liquidity, or boom and bust industries can occur quickly and the impact may not be reflected in recent real estate sales data.

The Valuation Process

The process of using comparable sales to arrive at a valid estimate of market value is as much an art as it is a science. It requires market knowledge, transactional real estate experience, access to real estate data, and an understanding of how to position a property on the market.

There are several steps in arriving at an accurate estimate of market value:

  • Investigate the Subject Property.
    The first step in estimating a subject property's market value is to investigate the property. Identify the property and gather information on the property as well as the surrounding area. Pull available data on the property including title and loan information if necessary. Note any property features and attributes that are relevant. If possible, visit the property. A property may be located adjacent to attractive or unattractive features that affect value.
  • Define market and property criteria.
    Once the property has been investigated, the specific parameters of the market must be defined. This establishes the criteria that will be used to identify comparable property sales or lease transactions.
  • Assemble Comparable Sales or Lease Transactions
    With the market and property criteria defined, sales data on similar properties is compiled. Any issues with the market may become apparent at this stage. For example, there may be a lack of comparable sales transactions.
  • Evaluate Sales Comparables.
    Identify differences between the subject property and comparable properties. Make adjustments to each transaction to factor out price differences between the comparable and subject property. Refine the selection of comparable sales.
  • Develop Comparative Analysis.
    Analyze the various price indicators. These may include Price/Unit, Price per Square Foot, GRM, Cap Rate. Analyze them against the subject property.
  • Finalize the final opinion of market value.
    Reconcile all the indicators to arrive at a single price. Explain the key factors that lead to the conclusion.



        

Comparable Property Sales and Market Value

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