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Appropriate Uses of Economic Characteristics in the Sales Comparison Approach

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Comparative differences in income, vacancy, expense, and net operating income (N0I) levels as well as their resulting ratios can be used to refine adjustments for elements of comparison, primarily for locational and physical characteristics. Variances in economic profiles may reflect external or functional obsolescence as well as other value influences. The preferred source for these adjustments is information provided by principals to the sales. Comparison of economic characteristics is an enhancement, however, not a substitute, for the sales comparison techniques of analyzing units of comparison and every effort should be made to maintain independence in the sales comparison approach.

Recent refinements in sales comparison approach methods have led to confusion and frustration among appraisers who often find that, in actual practice, matched-pair analysis seldom provides conclusive adjustments for any but the largest value influences resulting from physical and locational characteristics. As a result, many adjustments used in appraisal reports are subjective and not supported by empirical market evidence. While the reality may be that market participants are not precise in their evaluation of physical and locational characteristics, lack of quantitative support for adjustments made in the sales comparison approach is a common criticism of appraisal reports.

Many appraisers use mathematical formulas as a substitute for opinions or subjective judgment in order to substantiate their conclusions. If market activity can he simulated in this manner, it is an appropriate method. In some cases, however, methods are being used that are not in accordance with recognized sales comparison approach methods as taught in Appraisal Institute courses and texts. An area of particular confusion involves the comparison of net operating income (NOI) projections and operating ratios of the subject with those of comparable sales.

The levels of income, vacancy, and operating expense of a property and their resulting ratios compose the economic profile...