Uniform Appraisal Standards for Federal Land Acquisitions – Sales Comparison Approach – Comparable Sales

by James R.  MacCrate, MAI, CRE, ASA 
 
Introduction

The sales comparison approach is one of three valuation approaches applied by professional real estate appraisers to provide an indication of value for the subject property.  In the sales comparison approach, real estate professionals develop an indication of value for the property that is being appraised by comparing similar properties and making adjustments for the differences in the characteristics of  competitive properties that have been sold.  Special care must be taken in the selection of comparable sales when appraising properties for federal agencies.

 

These guidelines are outlined in the Uniform Appraisal Standards for Federal Land Acquisitions.  The IRS, Government agencies, banking institutions and Wall Street should consider these guidelines as well when formulating appraisal policies and procedures.  In the current market, it is important for real estate professionals to analyze listings, contracts of sale, and expired listings, as well as recent transactions.  The following is a summary of some of the issues raised by the uniform appraisal standards put forth by the Interagency Land Acquisition Conference. 

 

Highest and Best Use

In a previous post, we discussed that the highest and best use of the property being appraised is critical in the selection of comparable sales.  It is extremely important that the comparable sales have a similar highest and best use.  If the sales do not have a similar highest and best use, the indicated values derived from the comparable sales would be misleading and would lead the appraiser to the wrong conclusion.  Since the appraiser’s conclusion of the highest and best use must be based upon the economic benefits derived from the property, the comparable sales should have a similar economic use that produces similar economic benefits.  For example, if the appraiser is valuing a site that has a highest and best use to be developed with an office building, the highest and best use of the comparables should not be for industrial or retail use.  The motivations of the buyer and the economic benefits are completely different.  Similarly, corridors that are acquired for use by the rails to trails program are not comparable for utility corridors, railroad corridors or pipeline corridors.  The highest and best uses are different.  Greatest emphasis must be placed upon comparable sales that have a similar highest and best use.

 

Some Comparables Should Be Used With Care

Even when the most appropriate approach to a valuation problem is the income approach, if there are an adequate number of competitive properties that have sold, they should be analyzed and included in the appraisal report to establish a reasonable range within which the value of the subject should fall.  However, some sales should not be considered because the transaction price may not be indicative of market value. 

Sales that have occurred as a result of a tax-free exchange should really not be considered because the motivations of the parties involved in the transactions may be influenced by IRS requirements and restrictions.  Sales involved in federal land exchanges should also not be considered as comparable sales.  These sales may not represent the typical or most probable price that would be obtained in a competitive and open market.  Market value assumes that the transaction is between a willing buyer and a willing seller and is an arm’s length transaction after proper marketing, without compulsion (International Valuation Standards Committee).

 

Properties acquired through eminent domain may also be suspect sales along with negotiated sales to government agencies.  There are many reasons that government agencies acquire properties which may impact the transaction price.  The transaction price in these situations may not represent the normal consideration that would be paid after proper marketing and exposure in the marketplace.  For example, legislation may have been passed which would permit the condemning authority to pay more than market value.  We recently surveyed five condemning authorities which reported that they often offer more than market value to avoid the cost of condemnation and to maintain goodwill in the community.  In addition, government does not have to always have an economic justification for the price that has been paid.

 

In certain situations, the seller may contribute part of the property to take a tax deduction for a charitable contribution, which often overstates the value of the property condemned when the contribution is combined with the price paid by the condemning authority.  In one case, Southern Pacific Transportation Co., Plaintiff v. Santa Fe Pacific Pipelines Inc., Defendant, Southern Pacific recorded the sale price for several comparable sales utilized in the appraisal report which consisted of a tax deduction plus the price paid by the government agency, even though the government agency refused to pay the higher price.  Many times the appraisal that has been completed overstates the value in order to justify a tax deduction for a contribution.  Reportedly, this is quite common between sellers and buyers, such as government agencies and non-profit organizations.

 

It is also possible that the reported transaction price for a property that could be condemned represents a partial taking plus the damages to the remainder.  The indicated transaction price for the property acquired would be above market value for the property taken.  If this property was used as a comparable sale, it might overstate the indicated value for the subject property. 

 

It should also be remembered that many transactions to government agencies and environmental groups are politically motivated.  These sales should not be considered if the prices that are paid by the government agency do not represent the normal consideration that would be paid.  The Uniform Appraisal Standards for Federal Land Acquisitions states that there may be legitimate reasons for condemning authorities to pay more than market value.  Real estate appraisers must take this into consideration if sales to government agencies or regulated utilities are considered.

 

Caution

 

Clearly, real estate appraisers must carefully verify transactions that involve government agencies and other entities that have the power of condemnation and political mandates to understand the motivations of the buyer and seller and the financial arrangements that may impact the prices that are recorded in public records.

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About Jim MacCrate

Real estate appraiser and valuation consultant for more than 30 years specializing in reviewing real estate appraisals, risk management and quality control.
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