Section 4 Summary
This section established how the differences between a subject and each comparable are measured and removed, so that each sale indicates where the subject sits in the market.
What an adjustment is. An adjustment removes one difference between a comparable and the subject. The comparable is adjusted, never the subject; a superior comparable is adjusted downward and an inferior one upward. A sign that runs the wrong way moves the indication by twice the amount of the adjustment.
Which differences are adjusted. The categories that matter are those in which the market shows a price response: the terms of the sale, market conditions, location and site, condition, living area, room count, garage, below-grade area, and the features the market pays for. An adjustment is made when the market evidence shows buyers pay for a difference, at the amount the evidence supports. Differences between the subject and the comparable sales are generally adjusted, except when the difference is too small to quantify or the sales show no market reaction to it. A difference is not adjusted where the evidence shows no price response, where no measurement is available, where a feature is present in every sale, or where another adjustment already counts it. Several large adjustments on one comparable are a warning that it may not have competed for the same buyer, and where a more similar sale exists, even an older one, it serves the analysis better.
Where the figures come from. Adjustments are derived from the market. Paired sales measure a feature by comparing sales alike in everything but that feature, with any other difference accounted for first. The living-area rate starts from the Ratterman Method, the comparables’ average sale price per square foot multiplied by a factor of 25 to 33 percent tuned to the local land-to-value ratio, and is confirmed by pairs that differ mainly in size or by testing the result at more than one rate. Cost is a check on a market-derived figure, and it ordinarily supports an adjustment for an improvement the sales cannot isolate, such as a barn, with a current cost to build and proper depreciation; where the sales show no market reaction to an improvement, it is not adjusted, whatever it would cost to build. Bracketing bounds a feature that cannot be measured, with one sale superior and one inferior, and it also tests any figure proposed for that feature.
Market conditions. The market-conditions adjustment brings each comparable’s price forward from the date its contract was agreed to the date of the analysis. Its rate comes from trend data in the subject’s own segment, read from MLS closed sales by period, with the data set widened by the fewest steps when the segment is too thin. The sale-to-list ratio supports the direction the trend shows, paired sales over time are acceptable support, and the subject’s own prior sale is useful when it exists. The contract date is the date the contract was signed by both the buyer and the seller, recorded by the listing agent in the contract date field of the MLS record; the date the status was changed to pending is not the same thing. Where the MLS record does not show a contract date, the closing date is used and the analysis notes that it was. The direction of the market is established before any older sale is used, because the same sale is adjusted up in one market and down in another.
The terms of the sale. A recorded price is the price of the property only when nothing else was bought with it. Seller credits, buydowns and below-market financing are adjusted first, for their measured effect on price, with the face amount as the starting point where no matched sales show the effect; personal property is removed where the contract assigns it an amount; distressed sales are set aside where they are a small part of the market, or used with the sale type stated, and measured from pairs, where they are a large part of it; an estate sale is judged on how it was marketed and exposed; and a related-party sale, where the relationship is confirmed, is set aside unless nothing better exists, with the reason stated.
The grid. The concessions adjustment is made first and the market-conditions adjustment second, because they change the price the rest of the grid is measured against. The grid records every adjustment with its source and carries a net and a gross total in dollars for each comparable. It is read for direction, for completeness, and for the comparable that should have been replaced, before any figure is checked against its source.
From indications to a range. Adjusted indications are ordinarily weighed rather than averaged. The sale most similar to the subject and needing the least correction carries the most weight, the largest adjustments are tested at other plausible figures, and active and pending listings are read as guidance for positioning the list price, not as evidence of the range. The result is a price range supported line by line.
What you can now do
A broker who has completed this section can identify which differences between a subject and its comparables call for adjustment, derive each figure from the market and record its source, measure and apply a market-conditions adjustment from the contract date, remove concessions and sale terms from a recorded price, bracket a feature the market has not measured, and build, total and read a grid that carries three sales to a supported price range.
The section quiz follows.