1.5.2.3. Adjustment Process. Comparison of sales transactions to the subject property is the essence of the sales comparison approach to value. The basic elements of comparison to be considered are recognized as: 

• Property rights conveyed 

• Financing terms 

• Conditions of sale 

• Expenditures made immediately after purchase 

• Market conditions (historically referred to as a time or date of sale adjustment) 

• Location 

• Physical characteristics 

• Economic characteristics 

• Legal characteristics (land use, zoning) 

• Non-realty components of value included in the sale property55 

The comparable sales should be adjusted through quantitative and/or qualitative analysis, depending on the market data available, to derive an indication of the market value of the subject property.56 Quantitative adjustments should be made whenever adequate market data exist to support dollar or percentage amount adjustments. Qualitative adjustments (i.e., inferior, superior) can be made when market data is not sufficient to support reliable quantitative adjustments.57 Quantitative and qualitative adjustments are not mutually exclusive methodologies: because one factor of adjustment cannot be quantified by market data does not mean that all adjustments to a sale property must be qualitative. All factors that can be reliably quantified should be adjusted accordingly. When using quantitative adjustments, appraisers must recognize that not all factors are suitable for percentage adjustments. Percentage and dollar adjustments may, and often should, be combined.58 Each item of adjustment must be carefully analyzed to determine whether a percentage or dollar adjustment is appropriate. When both quantitative and qualitative adjustments are used, all quantitative adjustments should be made first.59 

When appraisers must resort to qualitative adjustments, more extensive discussion of the appraiser’s reasoning is generally required. This methodology may also require the presentation of a greater number of comparable sales to develop a reliable opinion of value. It is essential that the appraiser specifically state whether each comparable sale is generally either overall superior or inferior to the property under appraisal. The comparable sales utilized should include both sales that are overall superior and overall inferior to the property being appraised, rather than merely demonstrating the property is worth more (if all sales are inferior to the subject property) or less than a certain amount (if all sales are superior to the subject property). 

The definition of market value used in these Standards requires that the opinion of value be made in terms of cash or its equivalent, as discussed in Section 4.2. Therefore, the appraiser must make a diligent investigation to determine the financial terms of each comparable sale. When comparing the sale to the property being appraised, the appraiser shall analyze and make appropriate adjustments to any comparable sale that included favorable or unfavorable financing terms as of the date of sale. Such adjustment must reflect the difference between what the comparable sold for with the favorable or unfavorable financing and the price at which it would have sold for cash or its equivalent. 

While cash equivalency of favorable or unfavorable financing can be estimated by discounting the contractual terms at current market or yield rates for the same type of property and loan term over the expected holding period of the property, the preferred method of estimating a proper cash equivalency adjustment is by the analysis of actual market data, if such data is available. 

In developing a final opinion of market value by the sales comparison approach, the appraiser shall consider the comparative weight given to each comparable sale, regardless of whether quantitative or qualitative adjustments or a combination thereof are used.

55 See generally Appraisal Institute, The Appraisal of Real Estate 403-37 (14th ed. 2013) (discussing elements of comparison).
56 See Section 4.4.2.2.
57 Both quantitative and qualitative adjustments have strengths and weaknesses—and both can be misleading and unreliable without careful support. Without adequate market data, the apparent precision of quantitative adjustments can convey a false sense of accuracy. Similarly, without careful explanation of each element of comparison for each sale, qualitative adjustments can improperly obscure key aspects of the appraiser’s analysis.
58 For instance, a percentage adjustment for market conditions (time) may be appropriate, but an adjustment for the fact that the property under appraisal is 300 feet from a sewer connection and all of the comparable sales are connected to sewer should often be made in a lump sum dollar amount to reflect the cost to cure the subject property’s comparative deficiency. If a percentage adjustment were applied to the price per unit (e.g., per acre, per square foot) of each comparable, the adjustment to each of the comparables would vary, depending on the price per unit of the comparable, and might have no relationship to the cost to cure the subject property’s deficiency.

59 The Appraisal Of Real Estate, supra note 55, at 433-36.