4465.1

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CHAPTER 8. MARKET COMPARISON APPROACH TO VALUE

8-1. PRINCIPLE OF SUBSTITUTION. The comparison approach to value is

based upon the principle of substitution which states that a

prudent person will not pay more to buy or rent a property than

it will cost him to buy or rent a comparable substitute property.

The objective of this approach is to deduce from other sales the

amount which the subject property would bring on the market.

In theory, the best comparable sale would be an exact duplicate

of the subject property and would indicate, by the known selling

price of the duplicate, the price for which the subject property

could be sold.

8-2. UNITS OF COMPARISON. In apartment house comparison, the entire

project does not offer a convenient basis for comparison with

other entire projects since possible differences in size,

composition, areas, units and rooms are almost unlimited. For

this reason, it is customary to express the market prices found

in market comparables in some units of comparison. Some

frequently used units of comparison are: sale price per living

unit, sale price per room, sale price per square foot and gross

income multiplier.

a\. Comparison Approach Using Sale Price Per Unit. When the

unit of comparison is sale price per living unit, it is

important that size and/or composition be considered. If

the value of a subject property composed entirely of

efficiencies and one-bedroom apartments is determined by

comparison (without adequate adjustment) with other sold

properties all of which are composed entirely of two-bedroom

and three-bedroom apartments, gross error will result. For

this reason, the living unit is an undesirable unit of

comparison unless comparable sales can be found which

predominately are composed of the same kinds of apartment

units (in terms of number of bedrooms) as found in the

subject property. If there is considerable overlap in the

types of apartments (efficiencies, 1 BR, 2 BR, etc.)

between subject property and comparable sale property, the

sale can be used and differences in the percentage of total

units allocated to the various types of units, or even the

absence of one type of unit from a comparable property,

could be considered by an appropriate adjustment for size

or composition to that sale price per unit.

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Page 8-1 9/72

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4465.1 CHG

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\* (8-2) (1) After selection of comparable sales which are

satisfactory in terms of composition, the projects sold

which are most similar to the subject in terms of

location, rental range, remaining economic life, size

and intended tenant market are chosen from the larger

group as being those most useful for comparison. In

\* determining comparability, the sole basis for determining

whether a comparable sale will be utilized is

the determination of physical and locational similarities

and dissimilarities. The race, color, religion,

sex, or national origin of the residents of the area

have no bearing upon the estimate of rental value and

shall not be considered or mentioned on the appraisal

report. The address of property, date of sale, sale \*

price and number of units are recorded. In the next

column, sale price per unit is shown. Those property

characteristics which best explain the significant

value difference between subject and comparable properties

will be used as headings for adjustment columns.

These might be: location, time, size, composition,

livability, amenities offered, economic life, and any

other significant difference. For example, if some

projects have air-conditioning ana others do not,

adjustment is required either in a separate column,

or under \"equipment\" or under \"livability,\" or under

\"plan.\" But if subject and all comparables have

air-conditioning, this would not represent a factor of

adjustment. Adjustment is always made from the

comparable to the subject. \*

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2/79 Page 8-2 (1 of 2)

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4465.1 CHG

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\(2\) An example of entries and remarks in the comparison

approach using the living unit as the unit of comparison

follows:

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L. COMPARISON APPROACH TO VALUE. Adjustments

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Adj

S. P. Price

7\. Address of Sale No. per Eco Size Time Comb Subj

Comparable Date Price Units Unit LOC Life Adj. PU

Sale

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a\. 862 Avondale 6/68 1,080,000 100 10,800 .95 1.00 .98 1.00 .93 10044

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b\. 4436 Belvedere 5/67 1,187,500 125 9,500 1.02 1.05 .96 1.04 1.07
10165

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c\. 2937 Birchwood 3/68 712,800 72 9,900 1.10 1.00 .91 1.02 1.02 10098

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Subject Price PU \$10,100 x 84 units

8\. Indicated Value of Subject by Comparison \$ 848,400

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O. REMARKS CONCLUSIONS AND SIGNATURES

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Remarks. Section L (a) comparable in prestige neighborhood with prices

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approximately 5% higher than subject. (a) comparable units slightly

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larger than subject. (b) subject has park near, which makes location

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slightly better than comparable. (b) comparable has 10 years less

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remaining economic life than subject, for which local market gives 5%
more

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for longer lived property. (b) comparable has 15% of units in large 3BR

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apartments, subject has none; average size of subject apartment 96% of

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comparable. (c) comparable is outlying. Due to less distance subject

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location has prices 10% higher.

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2/79 Page 8-2 (2 of 2)

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(8-2) b. Comparison Approach Using Sale Price Per Room. If

projects of greatly different composition must be compared

because of scarcity of data, the sale price per room

offers less hazardous pitfalls for the appraiser than the

sale price per unit. Among other adjustments, if there is

a significant difference in average room size between the

subject and any comparable property, an adjustment for

room size would be needed. It is usually the case that

projects having a composition of unit types with a higher

number of rooms per apartment (other factors being equal)

will have less sale price per room than projects having a

smaller number of rooms per apartment. If the disparity

justifies it, an adjustment may be made for composition

between average number of rooms per unit in the two

projects. Other adjustments are also made for other

characteristics causing significant differences in market

prices.

c\. Comparison Approach Using Sale Price Per Square Foot. It

is obvious that with the square foot as the unit of

comparison, no further adjustment for differences in area

will be required. However, adjustments for composition or

other factors significantly affecting the sale price per

square foot of the projects being compared should be made

as described in foregoing paragraphs. An example of the

comparison approach, using sale price per square foot,

follows:

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(8-2) d. Comparison Approach Using Gross Income Multiplier. If an

apartment property sale price is divided by the annual

gross income, the result will be the gross rent multiplier

indicated by that transaction. When a number of sales

from equally good locations in the same community are

analyzed in this manner, the gross rent multipliers of

comparable properties with similar remaining economic

lives, similar attractiveness and livability, and offering

similar utilities and services included in the rent, will

normally fall in a fairly consistent pattern.

\(1\) If analysis of the sale of several comparable

unfurnished apartment properties reveals that each

sold at a price which was approximately 6 1/2 times

its annual gross rent schedule, then it is reasonable

to estimate that the subject property will bring a

market price approximating 6 1/2 times its annual

rent schedule.

\(2\) When such an estimate is made, the comparison

involves economic comparability and the unit of

comparison is the gross income multiplier.

\(3\) As in the comparison approach with any other unit of

comparison sales of other properties are sought which

are as much like the subject property as possible.

Among adjustments for other characteristics which

affect market prices, it is necessary to pay

particular attention to those which are not

automatically compensated

9/72 Page 8-4

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(8-2) for by the method used. These are location, time,

remaining economic life, and utilities and services

included in the rent. Adjustments for location should

reflect the differences in the typical gross income

multipliers as found in the two locations being

compared, rather than differences in sale price. For

example, assume there are two similar 8 unit apartment

properties; one in a location better than the other.

Apartment A, in the poorer location sold for \$60,000,

has an annual gross income of \$10,000 with a GIM of

6.0. Apartment B, in the better location, sold for

\$69,300, has an annual gross income of \$11,000, a GIM

of 6.3. When the gross income multiplier is the unit

of comparison and with the subject property located

next to Apartment B, then Comparable A would receive a

location adjustment of 1.05 in comparison with subject

property (which indicates the difference in income

multipliers) rather than 1.155 (which indicates the

difference in sale prices) or 1.10 (which indicates

the difference in rents). The location adjustment

should reflect differences in GIM, only, due to

location.

\(4\) Similarly, with time adjustments, a change in rent

levels alone is not reflected in the time adjustment

but a time adjustment is made for changes in the GIM

with the passage of time. Adjustments in GIM for time

and location should be minimal to avoid duplicating

adjustments which will be reflected in rent levels.

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8-3. ESTIMATE OF VALUE. Value is defined as the price which typical

buyers would be warranted in paying for a property for long-

term use or investment, if they were well informed, acted

intelligently, voluntarily and without necessity.

8-4. CORRELATION. Values produced by the summation, market price

and capitalization approaches should be correlated.

a\. A narrow range is usually indicative of a well conceived

property, properly balanced in respect to its physical and

economic characteristics and acceptable to the market.

Capitalization is the principal approach, since properties

of the type eligible for insurance under Section 207 are

planned, designed and located with the principal objective

of producing a monetary return to an investor owner for a

term of years and at a rate of return consistent with

market conditions at the time of the appraisal. The final

estimate of value will usually be that found by

capitalization, preferably rounded to the nearest \$100,

except that it shall never exceed summation or comparison.

b\. A word of caution in making the value determination. A

finding of economic feasibility in the feasibility stage

is a finding which has verified a market for the project

at supportable rents, with reasonable expenses and net

income sufficient to support a maximum mortgage which will

permit construction of the project contemplated. Such a

project in a normal money market should be built, and the

value determination, by definition being for long-term use

or investment, should be in a reasonable relationship to

project cost and debt service requirements. Where such is

not the case the pertinent factors in the value

determination must be carefully reanalyzed to make certain

no improper judgment has been used.

8-5. INELIGIBLE FINDING. If it is found that the application does

not comply with eligibility tests, an appropriate memorandum is

directed to the ADTSB/CU recommending rejection and stating the

reasons therefore, or setting forth the conditions under which

a finding of eligibility may be made.

This conceivably could happen in instances where there is only

one stage (Firm) processing, or where the sponsor has changed

plans and/or specifications.

8-6. TITLE II CONSIDERATIONS IN AREAS AFFECTED BY MILITARY, ATOMIC

ENERGY, OR SPACE INSTALLATIONS. See Reference 6 of the

Foreword.

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