Why You Must Adjust for Conditions of Sale in a Comparative Market Analysis (CMA)
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In a Comparative Market Analysis, adjustments to comparable property oftentimes are made to reflect the motivations of a delineated market area’s typical buyer and seller. Adjustments for conditions of sale reflect the motivations of buyers and sellers when they are not typically motivated and purchases do not reflect arm’s-length transactions.
ADJUST FOR SALES BETWEEN RELATIVES/FRIENDS
Family members often sell houses to relatives at prices other than market value depending on the relative financial strength of the buyer and the seller. It is often difficult to ascertain motivations without interviews. For example, parents may sell property at lower prices to help children purchase property, or children may attach greater importance (sentimental value) on property and pay higher than market value for them. Oftentimes, property will be sold to relatives for tax considerations and estate planning.
ADJUST FOR DIFFERENT FINANCIAL GOALS
Developers who believe that value can be increased through plottage resulting from greater utility of a larger site may pay more than market value for lots needed in a site assemblage. A seller might be under financial duress and require capital immediately, which will result in a quick sale at lower than market value.
ADJUST FOR TAX CONSIDERATIONS
There are instances where a sale occurs that is at arm’s-length but still requires adjustments for conditions of sale due to lack of exposure on the open market, unusual tax considerations, and eminent domain. With a new administration in the White House, tax policies will likely shift. Changes in capital gains tax, income tax level, and even positions in the security market will often influence investors to reallocate assets when assessing their financial situation from an overall portfolio context. Investigation as to whether adjustments can be made, supported by market evidence need to be made. Sometimes, comparables have to be thrown out or used only as secondary support data.
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