LM 2122: Land Valuation

Terans Gunawardhana
Senior Lecturer
University of Sri Jayewardenepura
Session 09: Market Approach
3 Comparative Method (The Sales
Comparison Approach)
The fundamental aspect of the application of
this method is based on the principle that a
prudent person will not pay more to buy a
property than it will cost to buy a comparable
substitute property in the open market.
The method rests on the wide acceptance of
market price as the best indicator of value.
 Cont…
4 A valuation of a property can be made by direct comparison with prices paid for other
properties in the open market. But this method is only reliable when :
(a) The properties are similar (both physically and legally, quality of the legal title is
similar)
+
(b) The income flow from the properties is similar
+
(c) The properties are in the same area (similar properties can have very different
values,
due simply to location)
+
(d) There are efficient records of many transactions. Records of isolated sales are not
sufficient.
+
(e) The transactions are fairly recent. Out of date sales evidence can be misleading.
+
(f) Property market is stable. An unstable market will affect the reliability of past sales
evidence.
5 Cont…

 Comparative method is the most important and most

widely accepted method of valuation.
 Eg. Government Agent V. Perera 7 NLR 313 (The Mount
Mary Case) of the several tests by which the market
value of a land may be arrived at, one of the truest and
fairest is the actual amount paid for a similar allotment of
land in the same vicinity about the time of the
acquisition
6 Cont…

 As a general principle the Comparison Method is one of

the first considerations for a valuer, as the Courts, Land
Acquisition Board of Review and Valuation Tribunals
have shown a preference for its use before more
complex methods are considered.
 This method is most applicable in sectors of the property
market where there are regular transactions to provide
the data and where the properties are similar in nature,
so that a like for like comparison can be made.
7 Cont…

 As those ideal conditions deteriorate so does the reliability of

the Comparison Method and other more specialized
valuation methods may then be needed. In the absence of
sufficient data to allow a quantitative approach comparison
elements may be expressed in qualitative terms such as
‘inferior’ or ‘superior’.
 Reconciliation involves consideration of the strengths and
weaknesses of each element. The valuer uses judgment to
determine the direction and magnitude of the effect that
each element has on value and assesses its relative
importance.
8

 Adjustment will have to be made to bring the

comparable evidence in to line with the subject
property. The main adjustments that have to be made
are for time, location, physical characteristics and
condition of sale.
9 Cont…

 Application of this method can be broken down in to

four steps.
1. Select comparable
2. Extract, confirm and analyze comparable sale prices
3. Adjust sale prices for noted differences
4. Formulate an opinion of open market value for the
subject property.
10 It is sensible for the valuer to formalize the comparative exercise on a sales
comparison sheet.

Sales Comparison Sheet

Adjustments for differences Comparable 1 Comparable 2 Comparable 3
1. Time of Sale
2. Sale condition
3. Physical characteristics
4. Accommodation
5. Services etc.
Net adjustment +/- +/- +/-
Adjusted value
11 Cont…

Direct sales comparison is the best and only

recognized method of valuing frequently sold
freehold vacant possession property. If a
property must be valued subject to the rights of
an occupying tenant, then the income or
investment approach must be used.
12 Cont…

 The principal factors for which adjustments must be made include

Property rights : An adjustments must be made in cases when less than

the full legal bundle of rights is involved.

Conditions of sales : An adjustments must be made for motivational

factors that could affect the sale such as foreclosure, a sale between
family members
13 Arm’s Length Transaction
 It may be necessary to adjust the comparable for
differences in sale conditions. This is to take account of
or preferably exclude any sales data arising from sales
not conducted at ‘arm’s-length’. When the sales
conditions were not normal market conditions. It could
have been a sale between members of the same family,
a quick sale to a cash buyer, a forced sale by a building
society to recover mortgage debts. All such sales can
be misleading.
14 Cont…
 Date of Sale : An adjustment must be made for time
difference.

 Recent Sales : To be considered in an application of the

sales comparison approach, a property sale should
have occurred fairly close in time to the date of
valuation. Within a normal market, sales no more than
six months before the date of valuation generally are
acceptable.

 Location : An adjustments may be necessary to

compensate for locational differences.
15 Unit of Comparison
 The market approach estimates value by comparing the
subject property to comparable properties that have
sold recently.
 The sale price of the comparable properties is adjusted
for differences between the comparable property and
the subject property.
 The purpose of the adjustments is to estimate the price
at which the comparable property would have sold if it
were the same as the subject property.
16 Cont…

 The price of each of the comparable properties is often

divided by an appropriate unit of comparison as a first
step in the adjustment process. The units used to
compare prices differ for different property types.
 The unit of comparison which is typically used is the price
per square foot for houses, shops and industrial
properties, the price per cubic foot for warehouses, the
price per seat for cinemas, the price per bed for hotels,
price per parking space for car parks and so on.
17 Example 1
The following are all single-story factories. All of them except for
two are on the same industrial estate.

A. Let recently at a net rent of Rs. 35,000/- p.m. Area 1000 sqft.
B. Let two years age at Rs. 60,000/- p.m. net. Area 2000 sqft.
C. Not let. Area 800 sqft.
D. Recently let at Rs. 15/- per sqft. Area 1100 sqft. This factory is
situated approximately 20 k.m. away.
E. Freehold interest of a factory sold this year for Rs. 5,250,000/-
(Capital value). Floor area 1500 sqft.
18 Cont…

 Assess the units of comparison for A, B, D and E.

 Which of the above factories provides the best comparable

evidence if it is necessary to assess the rental value of factory C give
reasons.
19 Comparability:
 The following are some of the principal considerations.

1. Factors integral to the property, including –

a. Space, design, condition and quality of building: heat, light,

services; economy in use; plot size;
b. Tenure, covenants, restrictions in title, easements,
boundaries, existing tenancies, rent charges;
c. Rent control, planning permission, compliance with other
statutes such as fire precautions, Offices Shops and Railway
Premises Act.
20 Cont…
2. Factors external to the property, including –

a. Location and access; transportation;

b. Neighbourhood and amenity, and trends towards
improvement or depreciation; town planning and
development schemes;
c. Services appropriate to the kind of property, eg schools
and shops for residential property;
d. Catchment area, eg (in the commercial sphere) for
labour, markets, customers, allied trades, competitors.
21 Cont…

3. Market considerations –
a. Are the comparable properties really in the same market as
each other? The market may be national, local or regional for
the property in question, and it may be further defined in
relation to the demand. For example, is a house with assured
loan facilities in the same market as one without this facility?
b. Changes in the market since the date of transaction.
c. The price should be a market price, negotiated ‘at arm’s
length’. Compensation settlements and some private
arrangements are not generally such good evidence as market
transactions.
22 Weaknesses of the Comparative Method

Even though the comparative method of valuation is

regarded as the best and most reliable method, there are
certain inherent problems arising from the fact that real
estate by their very nature are heterogeneous. The
difficulties associated with the comparative method may
be classified into the following
1. Lack of recent sales evidence
2. Subjectivity of adjustments
3. Sometimes sale prices are not genuine.
 Exercise: 1
23
Details of a row of shops (asbestos sheets roof, m/s walls, cemented floor with
electricity and water service in good condition) bearing Assessment Nos. 26, 28,
30, 32 and 34 Main Street, situated within the administrative limits of a Municipal
Council are given below.

Estimate the rental value of the premises bearing Asst. No. 34 Main Street.

Asst. No. Use Frontage x depth Monthly rent general

feet. tenure of tenancy

26 Pharmacy 16 x 45 Rs. 26,625/-

28 Textile shop 24 x 60 Rs. 45,000/-
30 Textile shop 30 x 60 Rs. 57,500/-
32 Book shop 20 x 45 Rs. 28,500/-
34 Communication center 25 x 40 Owner occupied
24

Thank you!