Professional Real Estate Appraisals in Muskoka
Direct Comparison Approach (Explained)
The Direct Comparison Approach is an appraisal valuation method that appraisers use to determine a value. Imagine you want to know how much your car is worth. You look at similar cars that were recently sold—same brand, model, and features. If the car you’re looking at has something extra, like a sunroof, you might subtract from its value (downward adjustment) to make it more like your car, because your car doesn’t have a sunroof. If it’s missing something, like good tires, you add a little value to make it more like your car because your car has better tires (upward adjustment). This way, you make the comparison fair, just like comparing similar cars to know their worth.Age/Condition Adjustment (Explained)
An age/condition adjustment is like deciding how much a car is worth based on how old it is and what shape it’s in. A brand-new car is usually worth more because it’s shiny, runs great, and hasn’t been used much. If a car is older or has problems, like scratches or a noisy engine, it’s worth less. Appraisers think about these things to adjust the value, just like you’d expect to pay less for an older, worn-out car than a new one.Age/Condition Applied to Total Value vs. Just Improvements
The primary debate centers around whether the Age/Condition adjustment should be applied only to the value of the improvements (i.e., the building and its features) or to the entire property value, which includes land.
Theoretically, adjusting only the improvements makes logical sense because the Age/Condition adjustment is directly related to the physical building itself, not to the land.
However, this creates a logistical challenge: every comparable would require an explicit breakdown of land versus improvement value. This can be time-consuming and may lead to variability or inaccuracies, especially if land valuations are not explicitly available or are inconsistent across comparables.
Practical Application:
Instead, many appraisers apply the adjustment to the entire sale price, often using a percentage that approximately captures the value difference attributed to improvements based on condition or effective age.
In this example, the adjustment for the Comparable is 30% of the adjusted sale price, which includes time adjustments.
Here’s the calculation for the Comparable:
Sale Price + Time Adjustment: $1,495,000 (original sale price) + $1,166,100 (time adjustment) = $2,661,100
Age/Condition Adjustment: $2,661,100 × 30% = $798,330 (this is the adjustment that’s being applied)
By using this method, the adjustment amount represents the impact of effective age and condition on the overall market value, without requiring a specific breakdown of land versus improvements for each comparable.
Summary:
Using 30% of the total sale price plus time adjustments for the Age/Condition adjustment is a practical shortcut that allows an appraiser to account for effective age and condition without separating land and improvement values.
Applying the adjustment only to the improvements is more theoretically correct but less practical because it necessitates estimating the land value for each comparable sale, which adds complexity, inconsistency, and potential inaccuracies and also appraisal standards requires support for each land value applied.
Diving Deeper
Different percentage adjustments can produce the same dollar amount of adjustment where the land value varies.
The same $798,330 adjustment could technically be achieved by subtracting different land values and adjusting the percentage to be applied. However, this adds another layer of adjustments that complicates the process without significantly increasing accuracy in most appraisal scenarios.
In practice, appraisers need to balance theoretical correctness with the feasibility and reliability of available data, making the simpler approach of applying the percentage to the total sale price a more efficient solution.
In the context of the appraisal process, especially when it comes to supporting adjustments like Age/Condition, determining where land values need support is crucial to ensure the accuracy and defensibility of the overall valuation. Here’s a detailed look at how and where land values need additional support, particularly in relation to adjustments in the direct comparison approach:
Land Allocation in Comparable Sales:
When applying adjustments like Age/Condition specifically to the improvement value (buildings and structures), the land component must be isolated from the total sale price. This requires understanding the underlying land value of each comparable.
Support is needed when:
The land values in the comparables are not explicitly known.
The market does not have a consistent basis for land value estimation, leading to variability.
Differences in site characteristics (e.g., size, location, topography, access) create value differences that aren’t clearly documented or understood.
To support land values, using a paired sales analysis of vacant land, extracting land values from properties in similar locations, or relying on site value allocation methods can help in isolating the land value more accurately.
Market Data to Support Land Value Estimates:
Land values can vary significantly based on location, zoning, waterfront access, view, and other unique attributes. These variations require additional support if:
Market data is limited: If vacant land sales or recent land transactions are sparse, the basis for land value allocation becomes unclear.
Adjustments are being made to land attributes: Features like waterfront size, access road type, or location may differ between the subject and comparables. Accurate land valuation is needed to apply meaningful adjustments.
The ideal approach is to use recent sales of vacant parcels that have similar characteristics to the comparables and subject property. Where such sales are not available, a land residual technique or allocation based on typical ratios (land to building value) might be necessary.
Avoiding Over- or Under-Adjustment:
If the land value is not adequately supported, the risk of over- or under-adjusting for factors like Age/Condition or Site Improvements increases.
Specifically: Without accurate land values, adjustments may inadvertently reflect a combined land and improvement value, instead of accurately isolating changes that affect only the building (like age and condition).
For instance, applying a 30% adjustment to the total property without accurately accounting for the value of the land versus improvements may misrepresent the effect of effective age on the market value of improvements alone.
To support these values, documented land value estimates should be validated through multiple approaches, such as comparative sales, tax assessments, and professional appraiser opinions.
Consistency Across Comparables:
Consistency is critical to ensure comparability between the subject and each comparable sale. Land values need additional support when:
Comparables exhibit significant differences in land characteristics (e.g., a 4-acre property versus a 1-acre property, or properties with different topography).
Adjustments for location or other site characteristics are being made: The land component needs to be supported by verifiable data so that adjustments are justified.
An inconsistent or unsupported allocation of land values across comparables can lead to a skewed valuation outcome that fails to reflect market behavior. Hence, it’s important to demonstrate that each land value estimate is supported by reliable data.
Examples of When Land Value Support is Critical:
Adjustment for Improvement-Only Attributes:
Consider the Comparable, where a $798,330 adjustment was applied for Age/Condition. If you intend to apply this adjustment only to improvements, you need to subtract the land value. To do so, each comparable sale must have a supported land value estimate.
If the Comparable has a sale price of $1,495,000 and an assumed land value of $300,000, then the improvement value would be $1,195,000. This means any Age/Condition adjustment must be based solely on the improvement value ($1,195,000), which requires that the land value of $300,000 is well-supported and accurately estimated.
Non-Uniform Land Characteristics:
Suppose the subject property is on 300 feet of waterfront, and other Comparable has 400 feet. If the sale price of other Comparable reflects a higher value due to the additional waterfront footage, then the appraiser must adjust for the land value difference.
To do this accurately, the land value of the additional 100 feet must be supported through market data or other reliable valuation techniques. Unsupported land value adjustments could lead to either overcompensating or undercompensating for this difference.
Practical Approach to Supporting Land Values:
Sales Comparison Analysis for Vacant Land:
Use recent sales of vacant or nearly vacant parcels to establish an approximate market rate for land, based on location and characteristics like lot size or waterfront access.
Allocation from Improved Sales:
Extract land values by subtracting improvement replacement cost (less depreciation) from recent sales of improved properties. This is a land residual approach that provides a rough estimate but may require additional supporting evidence to confirm.
Assessors’ Land Valuation:
Where reliable, use the land assessments from municipal property assessments as a baseline. While assessments can sometimes lag behind the market, they often provide a reasonable starting point for establishing land value in the absence of direct sales.
Paired Analysis for Land Characteristics:
For unique features such as waterfront access, conduct a paired sales analysis to determine the specific market reaction to those features and isolate the value contribution of the land component.
Conclusion:
Accurate land value support is critical when adjustments are being made that primarily affect improvements, such as Age/Condition adjustments. Without adequately supported land value estimates, the adjustments may inaccurately reflect market behavior, leading to misleading conclusions. A thorough analysis involving vacant land sales, assessor values, paired comparisons, and extraction methods can help appraisers provide the necessary support to validate land values across different comparables. This ensures the adjustments applied to reflect effective age, condition, and other attributes are both defensible and market-driven
As an AACI-designated appraiser with extensive experience in the Muskoka region, I provide reliable valuations that help facilitate fair settlements. Contact my office to discuss your appraisal needs or to schedule a consultation.
As an AACI-designated appraiser with extensive experience in the Muskoka region, I provide reliable valuations that help facilitate fair settlements. Contact my office to discuss your appraisal needs or to schedule a consultation.
