What an Adjustment Is, and the Direction It Runs

Section objectives

Upon completion of this section, the student will be able to: explain what an adjustment is, why it is made, and the direction in which it is applied; identify the adjustment categories that matter in a Connecticut residential market and the conditions under which a difference is not adjusted; derive an adjustment from the market by paired sales analysis; derive a gross-living-area adjustment by the Ratterman Method, with the factor that separates the living area from the rest of the price; use bracketing where a difference resists measurement; measure and apply a market-conditions adjustment for the passage of time; account for seller concessions, financing and sale type; and build and read an adjustment grid, recognizing when the pattern of adjustments shows that a sale does not belong.

No two properties are identical, and every closed sale reflects everything particular to the property that sold: its size, its condition, its site, its features, and the market on the day it closed. An adjustment is the amount by which a comparable’s sale price is changed to remove one difference between that property and the subject, so that what remains is an indication of what the comparable would have sold for had it been the subject. When every material difference has been removed, the comparable’s adjusted price is one indication of where the subject sits in the market, and three or more such indications establish the range.

The direction rule is the whole of the mechanics, and it is applied without exception. The comparable is adjusted; the subject is never adjusted. Where the comparable is superior to the subject in some respect, part of its sale price paid for that advantage, and that part is subtracted. Where the comparable is inferior, its sale price was held down by what it lacked, and the value of the missing feature is added. The subject is the fixed reference; each comparable is moved toward it.

Applied to a size difference: the subject is 2,000 square feet; a comparable of 2,200 square feet sold for $480,000. Some part of the $480,000 paid for the extra 200 square feet. If the market in that segment pays $60 for an additional square foot of living area, the adjustment is $12,000, subtracted, and the comparable indicates $468,000 for a 2,000-square-foot property. The phrase “adjusting the subject upward because it has a garage” describes a reversed analysis; where the comparable lacks a garage the subject has, the comparable is adjusted upward by what the market pays for the garage.

Superior and inferior are judged from the buyer’s side

Whether a comparable is superior or inferior in some respect is decided by what buyers in the subject’s market pay for, not by the owner’s opinion of the feature or by what it cost. A comparable on a cul-de-sac is superior to a subject on a through street only where the sales show buyers paying more for the cul-de-sac. A comparable with an above-ground pool is not automatically superior to a subject without one; in some Connecticut markets the pool produces no price response, and in others buyers treat it as something to remove. The direction of every adjustment follows from the same evidence as its amount, and where the market shows no response to a difference, there is no direction to assign and no adjustment to make.

The same reasoning sets the sign when a comparable carries a drawback the subject does not. A comparable that backs onto a highway sound wall or sits beside a commercial lot sold for less because of it, and it is adjusted upward by what the market discounts for that drawback. In a condominium complex, a comparable unit with a deeded garage space the subject lacks is adjusted downward for the space, and a comparable on a floor the market prices below the subject’s is adjusted upward.

One comparable, several adjustments

Most comparables differ from the subject in more than one respect, and the adjustments on a single sale often run in both directions. The subject in the following example is an 1,850-square-foot colonial with a two-car garage and an updated kitchen. The comparable is a 1,950-square-foot colonial with a one-car garage and an original kitchen, which sold for $455,000. In this segment the market pays $60 for an additional square foot of living area, $10,000 for a second garage bay, and $20,000 for an updated kitchen against an original one.

The comparable is larger, so part of its price paid for space the subject does not have, and $6,000 is subtracted. It has one fewer garage bay and an original kitchen, so its price was held down by what it lacked, and $30,000 is added. The comparable indicates $479,000 for the subject.

Had the signs been reversed, by treating the subject as the property being changed, the same three differences would have produced a net of −$24,000 and an indication of $431,000. The gap between the two figures is $48,000, twice the net adjustment, on one comparable. Because a reversal applies to every sale in the grid in the same way, the whole range moves by a margin of that kind, and the finished figures generally do not signal it.

Explaining an adjustment to a seller

Sellers often arrive with a neighbor’s sale in mind, and the direction rule is how that sale is put in its place. A seller whose 1,850-square-foot colonial has an original kitchen may point to a renovated 2,000-square-foot colonial down the street that sold for $520,000. The explanation runs from the sale to the subject: that house is 150 square feet larger, which buyers in this neighborhood paid about $9,000 for; its kitchen was renovated, which buyers paid about $20,000 for; with those two differences taken out, that sale indicates about $491,000 for a house like yours. The seller sees the neighbor’s sale used as evidence rather than dismissed.

What an unadjusted comparison costs is worth one paragraph, because it is the case for the entire section. Where every sale in an analysis is somewhat larger than the subject and no size adjustment is made, the range is high by the size premium in every sale. Where the sales are in better condition and no condition adjustment is made, the range is the range for a renovated house applied to one that is not. The error is systematic: it runs in one direction, it compounds across the sales, and it is invisible in the finished CMA unless the grid is read for the missing adjustments. As an illustration, in one market a two-car garage might be a $15,000 to $20,000 difference and a renovated kitchen against an original one $25,000 to $50,000. These figures are illustrations only and are not used in an actual CMA; each adjustment comes from the sales in the subject’s own market. Differences of that size are not noise, and an analysis that treats them as noise is not analysis.

How it applies. Every adjustment in a grid can be read for direction in a second: a superior comparable carries a negative adjustment, an inferior one a positive. A grid in which the signs run the wrong way, or in which the subject column carries adjustments, has reversed the analysis, and each indication it produces is wrong by twice its net adjustment.