How do you adjust for differences in location, size, and quality when comparing similar properties?

Location is a significant factor in property value. To adjust for location differences, you can compare properties in the same neighborhood or within a certain radius to ensure they are in a similar geographical area. Consider proximity to amenities, schools, public transportation, and safety when evaluating location differences. To adjust for size differences, calculate the price per square foot for each property. Quality differences can be more subjective, but you can assess factors like property condition, age, and renovations. Look for recently sold properties with similar characteristics

Using trades of similar properties in a given market is useful for triangulating a property’s value. Since recent trades will only be so similar to the subject property, they will require varying types and degrees of adjustment for market conditions, age/condition of property, location, income per unit/SF, etc in order to most closely approximate the subject property. An example might be adjusting the price of a 2022 transaction down by 10% to reflect the change in market conditions prevalent today. The end result of the sales comp approach is a range of unadjusted and adjusted values with a high, low, and average value. The sales comp approach is most powerful when used as a gut check on the value produced by the income approach.

The income approach is considered the gold standard and consists of the direct capitalization and discounted cash flow (DCF) methodologies. The discounted cash flow (DCF) approach enables assumptions around amount/timing/growth of property level cash flows and proceeds from a property sale that are discounted back to year 0 and added together to arrive at a value. This is powerful for non-stabilized properties or commercial property types with rollover. A more stable property like multifamily might use the direct capitalization method whereby estimated net operating income (NOI) is divided by a capitalization rate. Appraisers will frequently complete both approaches and determine which to more heavily rely on for value conclusion.

Typically, if one approach is significantly different from the others, this will be viewed as an outlier, and either not relied upon or be adjusted to come in closer to the others. Sales approach is too backward looking and adjustments can be somewhat arbitrary. Also, appraisers are not in the business of killing deals

As an investor in real estate sometimes you have to take a risk on a new location and then set the bar with the project you're taking on. Some of the biggest factors between neighborhoods that haven't been brought up and neighborhoods that already have been established are the amenities and finishes that come with those properties. For instance we bought a piece of infill next to a historic neighborhood but not in it. Our price point was lower due to the fact that other comparables in the neighborhood would not support a higher price yet. We still realized our value by putting in beautiful product and finishes and amenities that were still allowed to be considered when appraised. Win win!