Adjusted market sales

What Is Adjusted Market Sales?

Adjusted market sales refer to the process of modifying the sale prices of comparable properties to account for differences between those properties and a subject property. This technique is central to the sales comparison approach in real estate appraisal, a core component of property valuation. By systematically adjusting for dissimilarities, an appraiser aims to estimate the current market value of a property, reflecting what a willing buyer would pay a willing seller under normal conditions. This falls under the broader financial category of valuation and market analysis.

History and Origin

The concept of comparing similar sales to determine value has existed informally for centuries, but its formalization within the appraisal profession gained significant traction in the 20th century. A major turning point came with the savings and loan crisis of the 1980s, which highlighted a critical need for standardized and ethical appraisal practices. In response, the Uniform Standards of Professional Appraisal Practice (USPAP) were developed by an ad hoc committee of appraisal organizations in 1986–1987. The Appraisal Foundation, established in 1987, was formed to implement USPAP. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 further solidified the importance of standardized appraisals, authorizing The Appraisal Foundation as the source of appraisal standards and qualifications in the United States. This legislation mandated that appraisals for federally related transactions comply with USPAP, which emphasizes the structured application of methods like adjusted market sales to ensure accuracy and public trust.

Key Takeaways

• Adjusted market sales involve modifying the prices of recently sold comparable properties.
• The goal is to account for differences between the comparable and the subject property.
• This method is a cornerstone of the sales comparison approach in real estate appraisal.
• Adjustments can be made for various factors, including physical characteristics, location, and terms of sale.
• The final adjusted market sales provide an indicator of a property's estimated market value.

Formula and Calculation

While there isn't a single universal "formula" for adjusted market sales in the mathematical sense, the process involves a series of additive or subtractive adjustments to the sale prices of comparable properties. Each adjustment quantifies the monetary value of a difference between the comparable property and the subject property. The general concept can be represented as:

Where:

• Comparable Sale Price: The actual transaction price of a recently sold property considered similar to the subject property.
• Adjustments for Differences: Monetary values added or subtracted to account for variations in features such as lot size, living area, number of bedrooms/bathrooms, age, condition, quality of construction, date of sale (time adjustment), and terms of sale. These adjustments are typically derived from market data, reflecting what buyers are willing to pay for specific features or conditions. For instance, if a comparable property has an extra bathroom that the subject property lacks, a negative adjustment would be made to the comparable's sale price. Conversely, if the comparable lacks a feature present in the subject property, a positive adjustment would be applied. This meticulous process helps to normalize the comparable sales to be more reflective of the economic principles at play in the market.

Interpreting the Adjusted Market Sales

Interpreting adjusted market sales involves analyzing the range and clustering of the adjusted prices derived from multiple comparable properties. A professional appraiser will typically select several strong comparable sales—often three to five, but sometimes more depending on market conditions and data availability—and apply adjustments to each. The resulting adjusted prices should ideally fall within a narrow range. The appraiser then uses these adjusted values to form a final opinion of the subject property's value. This often involves weighting the adjusted sales, giving more emphasis to those comparables that required fewer or smaller adjustments, or those considered more similar overall. This process relies heavily on a deep understanding of real estate markets and the specific characteristics that drive value.

Hypothetical Example

Imagine an appraiser is valuing a three-bedroom, two-bathroom house with a two-car garage, built in 1990, located in a desirable neighborhood. The appraiser finds three comparable sales:

1. Comparable A: Sold for $450,000. It has four bedrooms (one more than subject), two bathrooms, a two-car garage, built in 1990, same neighborhood.
   • Adjustment: Subtract $20,000 for the extra bedroom (based on market data for bedroom values).
   • Adjusted Sale Price A: $450,000 - $20,000 = $430,000
2. Comparable B: Sold for $400,000. It has three bedrooms, two bathrooms, a one-car garage (one less than subject), built in 1992, same neighborhood.
   • Adjustment: Add $15,000 for the extra garage space.
   • Adjusted Sale Price B: $400,000 + $15,000 = $415,000
3. Comparable C: Sold for $420,000. It has three bedrooms, two bathrooms, a two-car garage, built in 1988 (older than subject), same neighborhood, but sold six months ago in a rapidly appreciating market.
   • Adjustments: Add $10,000 for its age (relative depreciation due to age difference) and add $5,000 for market appreciation over six months (time adjustment).
   • Adjusted Sale Price C: $420,000 + $10,000 + $5,000 = $435,000

The adjusted market sales are $430,000, $415,000, and $435,000. Based on these, the appraiser would reconcile these values to arrive at a final estimated market value for the subject property, possibly concluding it is around $425,000 to $430,000. This process offers clear due diligence for a property's valuation.

Practical Applications

Adjusted market sales are a fundamental tool with wide-ranging practical applications in finance and real estate. They are primarily used in:

• Mortgage Lending: Lenders require appraisals to determine the collateral value of a property before issuing a loan. Accurate adjusted market sales ensure that the loan amount is appropriately supported by the property's value.
• Real Estate Transactions: Buyers and sellers often rely on appraisals using adjusted market sales to negotiate fair prices. Real estate agents use the principles to perform a comparative market analysis (CMA).
• Tax Assessment: Local tax authorities use appraisal methods, including sales adjustments, to determine property values for tax purposes.
• Estate Planning and Probate: Valuing real estate for inheritances or trusts often requires an appraisal based on adjusted market sales.
• Eminent Domain: When a government entity acquires private property for public use, adjusted market sales help determine fair compensation to the landowner.
• Investment Analysis: Investors evaluating potential investment property will use adjusted market sales to gauge potential returns and risks. For example, understanding how properties with specific features or locations are valued through adjustments can inform investment decisions. Data on the median sales price of houses sold for the United States, published by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development via FRED, provides crucial macro-level context for these local market adjustments.

L⁴imitations and Criticisms

Despite its widespread use, the adjusted market sales method has limitations. One primary challenge is the subjective nature of determining the "value" of each adjustment. While market data guides these adjustments, the appraiser's judgment plays a significant role, particularly in markets with limited comparable sales or unique properties. Another criticism involves potential for bias, especially racial bias in appraisals. Research indicates that homes in majority-Black neighborhoods can be appraised at significantly lower values than comparable homes in non-Black neighborhoods, even after accounting for property characteristics. This ³bias can lead to a substantial devaluation of assets and hinder wealth accumulation for homeowners in these communities. The a²ccuracy of adjusted market sales also depends heavily on the availability of truly comparable properties and the transparency of sales data. In illiquid markets or those with atypical sales, finding reliable comparables can be difficult, potentially leading to less precise valuations. Furthermore, this approach may not be ideal for unique properties where direct comparisons are impossible. In such cases, other property valuation methods like the cost approach or income approach might be more suitable.

Adjusted Market Sales vs. Fair Market Value

Adjusted market sales is a methodology used within the appraisal process, specifically the sales comparison approach, to arrive at an estimate of a property's value. In contrast, fair market value (FMV) is the ultimate objective or conclusion of an appraisal. FMV is defined by the IRS and widely accepted in the financial community as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. Adjusted market sales is the analytical step where an appraiser manipulates comparable sales data to reflect the subject property's attributes, with the aim of producing an accurate estimation of its FMV. Thus, adjusted market sales is a means to an end, with fair market value being that end. The Internal Revenue Service (IRS) outlines principles for determining FMV in IRS Publication 561, which guides taxpayers and appraisers on valuing donated property, emphasizing that FMV depends on actual transactions and not arbitrary formulas.

F¹AQs

What types of properties can be valued using adjusted market sales?

This method is primarily used for valuing residential and commercial properties where sufficient comparable sales data exists. It is most effective for properties that are not unique and for which a competitive market exists.

What factors require adjustments in the sales comparison approach?

Adjustments are made for various factors including physical characteristics (e.g., size, number of rooms, condition, age, garage), location (e.g., proximity to amenities, neighborhood desirability), and terms of sale (e.g., financing concessions, personal property included). The purpose of these adjustments is to make the comparable properties truly comparable to the subject property.

Are adjusted market sales the only way to value a property?

No, adjusted market sales are one of three primary approaches to property valuation, alongside the cost approach and the income approach. Appraisers often use a combination of these methods, depending on the type of property and available data, to provide a comprehensive appraisal.

How do appraisers determine the amount of each adjustment?

Appraisers determine adjustment amounts by analyzing market data. This can involve paired sales analysis, where two nearly identical properties are compared with only one differing characteristic, or statistical analysis of multiple sales to isolate the value contribution of specific features. Their expertise in real estate markets is crucial in this process.