Understanding Adjustments in the Sales Comparison Approach for Commercial Real Estate Appraisals

USPAP Standards and the Sales Comparison Approach

The Uniform Standards of Professional Appraisal Practice (USPAP) set the ethical and performance standards for real estate appraisals in the United States. Specifically, Standards Rule 1-4 requires appraisers to collect, verify, and analyze all relevant information when developing an appraisal, ensuring credible results. StandardsវStandards Rule 2-2(b)(viii) mandates that appraisers explain the methods and techniques used, including adjustments in the sales comparison approach, and justify the exclusion of any approach.

These rules emphasize the need for market-derived data to support adjustments, often interpreted as requiring empirical evidence like paired sales analysis. However, this interpretation does not mandate strictly empirical adjustments, allowing appraisers flexibility to use qualitative judgment when market data is insufficient, provided it is well-supported and documented.

In practice, the sales comparison approach is inherently qualitative, even when using dollar or percentage adjustments. These adjustments reflect the appraiser’s professional judgment of value differences based on market knowledge, not necessarily empirical data from paired sales. This qualitative nature ensures adjustments align with market expectations, even if expressed numerically.

Qualitative vs. Quantitative Sales Comparison Adjustments

Example of Qualitative Adjustments (Superior or Inferior)

Qualitative analysis involves ranking comparable properties as superior, inferior, or similar to the subject property, often using plus or minus signs to indicate relative value. This method, common among brokers and property owners, provides a general sense of value but lacks precision in quantifying the magnitude of differences. For example, a comparable might be rated as “better” or “worse” without specifying how much. (click to expand)

Quantitative Adjustments are not necessarily Empirical.

Quantitative analysis applies dollar or percentage adjustments to comparable sale prices to align them with the subject property’s characteristics. Methods include:

• Paired Sales Analysis: Comparing two sales that differ in one characteristic to isolate its value impact.

• Regression Analysis: Using statistical models to estimate value impacts of multiple variables. Sometimes, this is useful for industrial real estate - Unearthing Value: The "Land To Building Ratio" Valuation Method Enhances MAI Appraisal Reports

• Cost or Income Approaches: Estimating value based on replacement cost or income potential.

While quantitative adjustments appear empirical, they are often qualitative in nature. Appraisers typically use their judgment, informed by market trends and experience, to assign dollar or percentage adjustments for differences in location, size, condition, or amenities. These adjustments are not always derived from direct market data like paired sales but reflect the appraiser’s interpretation of market behavior.

At SFRE Appraisal, we use qualitative analysis with percentage adjustments to clearly convey both the direction and magnitude of value differences. This approach meets client expectations for numeric clarity while adhering to USPAP’s flexibility in adjustment methods.

Practical Challenges with Paired Sales Analysis

The Appraisal Institute’s MAI (Member of the Appraisal Institute) and SRA (Senior Residential Appraiser) designations, as well as Florida’s real estate appraiser certification and sales licensing exams, emphasize proficiency in paired sales analysis. This technique isolates the value impact of a single characteristic by comparing two otherwise similar properties.

However, in practice, paired sales analysis is often impractical for commercial real estate appraisals. Finding two properties that differ in only one characteristic is rare due to the complexity and uniqueness of commercial properties. Additionally, limited transaction data in slower markets or unique property types can render paired sales analysis unreliable.

Appraisers quickly learn that while paired sales analysis is a valuable academic tool, it is often not always credible. Instead, qualitative adjustments based on market knowledge and professional judgment provide more credible results in diverse or data-scarce markets. Our approach at SFRE Appraisal prioritizes qualitative analysis with percentage adjustments to deliver transparent, market-aligned valuations that clients understand and trust.

Why Choose SFRE Appraisal?

Our appraisals combine the rigor of USPAP compliance with the clarity of quantitative adjustments, ensuring credible and understandable valuation reports. By leveraging qualitative analysis, we avoid the pitfalls of overly rigid empirical methods, providing well-reasoned valuations that reflect real market dynamics. Contact us at sfreappraisal.com to learn more about our professional appraisal services.