Comparable sales are the key ingredients in performing the sales comparison analysis. The sales comparison analysis is one of three primary approaches to valuing real estate. The two other primary approaches are the income approach and cost approach. The sales comparison approach is often considered the most reliable approach in valuing houses and owner-occupied commercial properties. It is also widely utilized as additional support for the income approach or the cost approach when valuing other types of property.
Comparable sales confirmation can be a time-consuming and tedious process. In many states, including Texas, the sale price is not readily available to the public. Texas is what is sometimes referred to as a nondisclosure state. In "full disclosure" states the sale price of real estate is publicly available.
In addition to obtaining the sales price, there are multiple additional factors which need to be verified to best understand the meaning and implications of the sale. Conversations or interviews with the buyer, seller, broker or other parties involved in the transaction can provide meaningful insights into the issues affecting the sale price.
While the market value of real estate is often quite similar to the sale price, in many cases the market value is different than the sale price. A central factor is whether the transaction was an "arms' length sale". If the buyer was under duress to purchase the property to complete a tax-free exchange (1031 purchase), the sale price may have been higher than typical due to the buyer's motivation. Conversely, if the seller is financially distressed or eager to sell to obtain cash for other purposes, the purchase price may be less than typical. Favorable financing can dramatically impact the sale price while unfavorable financing can effect a sale price less than market value (without consideration of the financing). Favorable or unfavorable leases can have a material impact on the sale price of real estate. For example, if market rent for a property is $20 per square foot but the building has leases (in effect for another 10 years) at $30 per square foot, the purchase price can be artificially inflated to a level far in excess of the fee simple value.
Comparable sales confirmation should address as many of the following elements as possible:
Basic property information
Grantor
Grantee
Sale price
Sale date
Financial data Capitalization rate
EGIM
Comments
Information from the buyer, seller and other parties regarding issues which positively or negatively affected the sales price.
Confirming comparable sales is a detailed and time-consuming process. Obtaining the best available information regarding the most comparable sales provides essential data for effectively performing the sales comparison approach.
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