It is often difficult to price a property that you are going to sell, or evaluate the value of a property that you are going to purchase. Comparable sales, or comps, are the best tools that commercial real estate brokers, agents and investors have to determine the true market value of any property.
Comparable sales are properties that have actually sold, not just listed, that have the same zoning, acreage, intended use and other similar characteristics in relation to the subject property. These properties that have sold indicate what the market is willing to pay for such properties, and are the best to base the value of the property going to sale, or to be purchased.
Comparable sales may not always be the most accurate for your specific property. They could be from many years ago, may not be of similar use, many not have the same characteristics such as the availability of utilities, or may not have a comparable amount of road frontage, or could be a considerable distance from the subject property.
In order to get around this problem, you must use the closest properties that you can. You simply adjust the price according to the changes in the market or property characteristics.
For example, if a comparable sale was from 2001, and the current year is 2006, then you can adjust the price according to the appreciation that the overall commercial market has experienced in a specific area.
Or, if the subject property has a total road frontage of 200 feet, and the comparable sale property has frontage of 1000 feet, you can adjust the price or value appropriately.
As you can see, finding the true current market value of a property can take some investigation and adjustment in relation to the properties that have sold in the past. The more recent and similar the comparable sale is, the easier and more accurately you can assess the true value of the property.
It is a good idea to collect as many comparable sales as possible and take inventory of each. What are the characteristics? What are the uses? Assess each one individually and then group them together to determine an overall consensus. You should be able to determine the current market value at this point. The more properties you have to pool from, the more accurate a number you will have.
Very often brokers or agents supply you with comps from the area of interest as part of the service of selling the subject property. If you are not familiar with the area, you must be leery of the comps that they send you.
I have received comps of properties in the most affluent areas for a subject property that was positioned in a lower to medium class area which completely misrepresented the true market value of the property. Unless I had investigated further and asked many questions, I could have easily taken this property as a true comparable sale, and would have expected a far greater return than what I really would have experienced.
Using comparable sales can be tricky in an area where sales are not abundant. If necessary, use a similar city and find properties that may be more appropriate for the subject property. A broker or agent familiar with the area, one that does not have an interest in the subject property, may be a good source to analyze and critique the validity of the comps at hand, as well as applying them to the subject property. |
