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Workshop 6 – Assessing the market potential

Workshop 6 – Assessing the market potential

Market analysis using comparable sales and competing properties – by Peter Rossini and Philip Beaton
In this topic, we examine the market potential of properties and how different people ascertain the worth of a property. We consider the basic appraisal processes by analysing comparable sales and competing properties in the market and the collection and interpretation of appropriate data.
Tasks
To ascertain the likely selling price (appraisal price) of a residential property using the direct comparison approach.
Objectives
• Consider the source and use of appropriate property data
• Determine the appraisal price of a residential property by applying the worse / better comparison technique at a broad property level.
• Apply additional adjustment techniques such as breaking down the issues of comparison and applying simple units of comparison.
Procedure
This is the most complex of the workshops but also the most critical.
The workshop is in two parts. Part 1 is a case study for you to work through and will be used in class as the class activity for individuals and can be discussed on the forum for externals. Part 2 is a similar case study for you to work on individually and submit as your topic 6 continuous assessment item.
Part 1 – Case Study – Internal Students will use this in class, External Students should work through this and look at the model solution.
An audio/video presentation is available for this case study.

A hardcopy question sheet is printed in your study guide. You can also download this here. This workshop requires you to compare the subject property with seven comparable properties using different criteria. The first of these criteria is the overall property comparability followed by comparability based on site, location building quantity and building quality. The comparison should be based on the better, same, worse approach and expressed in dollar terms. You also need to examine the relationship between the sale prices and the building area using a simple graph. From this analysis, you should arrive at an appraisal figure. You will need to justify your appraisal figure and suggest ways that the accuracy of the results can be improved. For internal students, issues arising from the exercise can be discussed with your tutor in the workshop. For external students, you should discuss this on the forum.
The case
This exercise involves the appraisal of a detached residential house. The house is located in Womtown (this is a simulated town, it does not exist but we will use it as a generic case study). Your task is to appraise the property to establish what you think it might sell for in the open market. For this exercise, we do not want you to take the position of either the buyer or seller as this may tend to bias your opinion to the high or low side of the market value. We want you to use the method suggested in the lecture and study guide to find what you believe to be a fair price for the property.
Womtown is a large neighbourhood defined by the suburb and is within a larger city area approximately mid-distance to the city. It is characterised by a variety of land uses including many small retail and commercial uses along the Main Roads. A major arterial road (More Main Road) runs through the area and continues to the CBD. This intersects with Main Road which is the major feeder road in the area. Other roads are relatively quiet by comparison to the main roads with More Main Road having very high traffic noise for most of the day. Housing in the area is predominantly detached houses on single allotments and there appears to be no demand for redevelopment to higher density properties. The housing ranges in ages from the early 1900’s when the area was first established, through to modern housing with older houses often being as small as 85 square metres. Prestige properties in the area are characterised by large older homes of up to 250 sqm in good condition, on large sites, in quiet back streets. Building area and the number of rooms seem to be the major value determinate. The area has relatively stable prices at this time. For the purposes of this exercise you can consider that the comparison properties differ only by the characteristics mentioned – outside of these they may be considered comparable and hence these factors do not affect relative value between the properties.
Subject Property
18 More Main Road, Womtown – To be appraised

Erected on this 690 sqm site is a 120 square metres house of 5 rooms with a detached single iron garage. The house encloses a kitchen, lounge, formal dining room, two large bedrooms, one bathroom and a separate toilet and laundry in an attached lean-to. The house was constructed in about 1950 and is in average structural condition, but needs minor repairs and maintenance. The steel frame windows at the front of the house have been recently painted. The carpet in the hall and bedrooms are worn, but the floors feel solid. Some wall and floor tiles in the bathroom are cracked. There is evidence of mould near the skirts on the south facing walls in the second bedroom. There is no major cracking evident inside the house. All fixed electric equipment appears to work, hot and cold water is running but water drains slowly from the kitchen sink. Water, sewer, electricity, phone and gas are connected. The front garden is small and neat and about 15 fruit trees that have been carefully maintained at the rear. The rear garden also includes an extensive vegetable plot and chicken run. The title shows the property is owned in fee simple with no significant encumbrances.
Sale Properties
All sale properties have sold within the last 4 months in a market that is considered stable (no price increases or decreases) and with no significant changes in the local or national economy. All sales have the same zoning and none are considered to have any development opportunity. All properties are well serviced by public transport.

28 Calcton Road, Womtown
Price: $511,000
Site Area (sqm): 560, House Area (sqm): 130, Main rooms: 6, Undercover Carparks: 0, Built about: 1930, Condition: average structural condition, in need of major repairs and maintenance, Garden: basic landscaping and a garden with some established trees and/or shrubs.
See the remaining 6 properties.Click to SHOW the remaining sale properties
Steps used in this Case Study
Step 1 – Overall Comparison
The overall comparison technique is the broadest starting point. Using the workshop provided (the column headed “overall”) consider each property and decide if you believe it to be – much worse, worse, same, better, much better. For some properties, this will be easy – for other the decisions will be tougher as some aspects may be better and some worse. Try this as an overall technique first before we try to break the problem down. You should be able to “bracket” the probable price range from your deliberations.
Step 2 – Breaking the problem into smaller issues
Now we approach the problem in a similar manner but by breaking the issues down into separate issues. The next three columns of your workspace break the issues down into three categories: Site, Building Quantity and Building Quality. Assess each property separately on these three issues using the same much worse, worse, same, better, much better criteria. Considering the issues separately may help your judgement. You should revise your overall comparison once you have done this.
Step 3 – Trying some Units of Comparison
Another basic analytical technique that may help you understand the market is the use of simple units of comparison and data plotting. Plot the relationship between price and building area. You can also try the relationship between price and land area. Look for obvious relationships and if any properties seem to sit outside the relationship. Is there a good reason for them to be different? e.g. the “facelift” or renovated property appears to be a physical outlier does this appear to be the case on the plot?
Units of comparison can be calculated by dividing the sales price by a unit that is useful for comparison. Your plot might suggest the appropriate unit to use. You should also arrive at a rate per square metre and use this to support your decision.
Outcomes for the Case Study
Estimate the value of the subject property using the various techniques and develop a comprehensive argument that this is the value You should make explicit comparisons to relevant properties and support any opinions with facts and or arguments. Estimate the value of the subject property using the various techniques. Once you have finished the exercise – reflect on the process you have adopted. How could you improve the accuracy of your result? If you want to seek additional data what would you look for – remember these are ALL the sales of houses in this suburb in this year. If you want to look for more data it will be in a different location or more remote in terms of time.A suggested solution for this workshop is available. Click here to download printed version.
Internal students will work in groups. Each group will elect a member to stand and present the group argument as to the appraisal price. Try to specifically address how your property compares with specific comparable sales.
External students should work through the case study and use the External Forum to discuss issues.
Part 2 – Appraisal Justification – To be submitted online by each student individually
For this part of the workshop, you should download the Appraisal Justification worksheet that includes the details of the problem and has a table that you might use when your justification. You can also download this here.
This task requires you to compare the subject property with seven comparable properties using 3 different criteria. The first of these criteria is the overall property comparability followed by comparability based on site, location building quantity and building quality and then using Units of comparison. You will need to justify your appraisal figure and suggest ways that the accuracy of the results can be improved. This should follow the approach used in the case study above.
The property to be appraised
This exercise involves the appraisal of a detached residential house. The house is located in Leaftown (this is a simulated town, it does not exist but we will use it as a generic case study). Your task is to appraise the property to establish what you think it might sell for in the open market. For this exercise, we do not want you to take the position of either the buyer or seller as this may tend to bias your opinion to the high or low side of the market value. We want you to use the method suggested in the lecture, study guide and case study to find what you believe to be a fair price for the property.
Students: please note that “LEAFTOWN” is a fictitious, eastern Adelaide suburb, it does NOT exist!! This is for university purposes only and the general description of Leaftown does NOT fit with any actual suburbs in Adelaide.
Leaftown is a highly sought after suburb in Adelaide, only 4 kms from the CBD. It has a train link to the Adelaide CBD, and in fact, the nearest station is only 50 metres away. The property is situated only a few hundred metres from a major shopping centre that offers a large supermarket, many fashion stores, a hardware store, restaurants and cafes and so on. The proximity to the centre has no negative effects such as customer car parking, noise and or other impediments.
Schooling is excellent with a highly regarded secondary school only 300 metres from the subject. No known contamination issues have arisen within the locality.
• Leafy Street is a very pleasant street with no retail and or commercial activities. It is about 100 metres from More Leafy Street. This street carries light and local traffic only.
• Not far away is More Leafy Street. This is a wider street that the Leafy Street, accommodating larger, more established homes generally having higher values. This street carries light and local traffic only.
• Local Street is not as wide as Leafy Street, with some older homes and it also has quite a few more intensive housing developments such as units and flats. This street carries light and local traffic only.
• Busy Street is a local street similar to Leafy Street but it does carry lots of traffic at peak hour time. Buses also frequently run along this road.
Workshop Outcomes:
Following the example in the case study, you should estimate the value of the subject property using the 3 different criteria and justify your appraisal price with a written argument supported by your analysis. It’s not enough to simply say this is what think it’s worth. You need to develop an argument about why this is the price based on the sales evidence. Click here to see the marking rubric. (This tells you what aspects are being assessed). Post your worksheet for Part 2 – Appraisal Justification (in Word or pdf) to the Topic 6 Workshop – Appraisal Justification link.
Applying this to your Project
On completion of this workshop, you should be able to apply the direct comparison approach to the appraisal of your property firstly by selecting and analysing appropriate comparable properties to arrive at a likely selling price and then to consider competing properties currently on the market and if necessary to fine tune the appraisal figure.
A first step is to refer to property sites that I have suggested in the lecture. Go to Finding Data about Property in South Australia. Your aim should be to collect the most appropriate and relevant data and build on the data set of comparable sales both in terms of quality and completeness. The earlier you start this process the better so don’t leave this too long. By getting started now you will also be able to track the market to see what is selling, at what price and what other properties are coming on the market. Keeping an eye on the local paper and the internet will be a great help in getting a feel for the market where your property is located.
The number of comparable sales that you require is largely dependent on the quality of the comparable properties available and how much they contribute to the appraisal process. However, in general, 5 would be a minimum if they are truly comparable. Once you have analysed the comparable sales and reached an appraisal figure you can consider the properties currently on the market (competing properties) but not yet sold.
The properties currently on the market should be used as a check mechanism in determining whether the market has changed since the sales were recorded and whether the supply and demand factors at the micro level are now impacting on the subject property. So once you have determined the appraisal figure using the comparable sales, competing properties currently on the market should be used as a fine-tuning mechanism in arriving at a final likely selling price.
Be mindful that the likely selling price process is subjective and the overall appraisal figure that one person comes up with, may very well be different to what you assess it to be. The point to remember when you apply the process to your Project is the importance of selecting appropriate comparable sales and selecting meaningful comparison characteristics. This will allow you to structure a robust and defend-able argument to better justify your assessment of the appraisal price. The challenge in this part of the project is to ensure that you provide sound justification for your analysis. In your report, you are to include a data sheet of actual and verifiable cases including the source of your data as clear evidence in support of your analysis.

Developing Opportunities in Property
Workshop 6 – Establishing Appraisal Price
Students
Comparison Table
Address Sale Price Overall Site Location Building size Building quality
28 Calcton Road $511,000 Better
(bigger and better location) Worse
(560m2 to 690m2) Better
(not on a main road) Better
(130m2 compared to 120m2) Worse
(Older and in need of major repairs)
37 Boulton Road $418,500 Worse
(smaller size and worse site) Worse
(405m2 to 690m2) Better
(Not located on a main road) Worse
(108m2 compared to 120m2) Worse
(Older and in need of major repairs)
25 More Main Road $370,500 Better
(Better site and better location) Better
(690m2 equal to 690m2) Better
(Not situated close to main road) Worse
(111m2 compared to 120m2) Worse
(Older and requires significant repairs)
26 More Main Road $412,250 Worse
(Smaller size and better location) Worse
(626m2 equal to 690m2) Better
(Not situated close to main road)
Worse
(113m2 compared to 120m2) Better
(In need of minor injuries)
4 Nilginee Street $576,000 Better
(Bigger and better location) Worse
(685m2 equal to 690m2) Better
(not on a main road) Better
(130m2 compared to 120m2)
Better
(Minor finishing works needed)
22 Arcola Road $487,750 Better (Bigger and better location)
Worse
(607m2 equal to 690m2) Better
(Not situated close to main road) Better
(122m2 compared to 120m2)
Worse (in need of major renovations and adjustments)
34 Main Road $545,000 Better
(Bigger, good condition and location)
Worse
(625m2 equal to 690m2) Better
(Not in the main road) Better
(146m2 compared to 120m2) Better
(minor repairs and maintenance needed)

Plot the relationship – Price Vs Building Area

From the graph above, it is clear that properties that covers a larger building area in sq metres are likely to cost more. The line graph shows that the selling price for the properties will increase as the building area increases. The property to be appraised has 120m2, which translates to selling price of $475,000. However, there are other factors that might increase or reduce selling price apart from the building area. It is important to consider all the factors as they will impact on the overall valuation of the property.

Other Plots or Units of Comparison
Other important aspects of comparing the above properties includes the previous occupant’s history, the security of the neighborhood, access to social amenities such as banking and school facilities, and the market average prices for the properties. For example, the security of the location could lead to increased value for the property situated in the area. Market prices could also affect the valuation process as the buyers will rely on the market trends to determine the appropriate prices for the property. For owners with school going children, the access to school facilities is critical and thus, they would factor the accessibility to schools in the valuation of the property. If schools are not located closely, the buyers might not prefer the property. These units of comparison help to influence the different in the valuation of the properties.
Two most comparable properties:
1. Address 26 More Main Road Sale Price: $412,250
2. Address 4 Nilginee Street Sale Price: $576,000
My overall appraisal of the property based on data available is $550,000
The valuation of $600,000 is appropriate given its good condition and far better location. The size of the building area is adequate at 120m2 compared to other building in the similar locations. The size of the building is important and it is an important factor for the clients. It has 5 rooms with a detached single iron garage that makes it convenient with car owners. The house comprises of kitchen, lounge, formal dining room, two large bedrooms, one bathroom, and a separate toilet and laundry. The rooms fit the needs and requirements for most property owners and tenants. The building is erected on a 690 sqm site location. The house is not located close to main town and thus, making it a good location for a residential house. A house located away from the main town is good for residential purpose as it provides a quiet and ambient environment for people to live peacefully. The large building area is good characteristic for the property as buyers would consider it as a key competitive advantage compared to other properties.
Most importantly, there is no major repairs and maintenance needed to the house. The average structural condition of the house is good. The steel frame windows were only painted recently. The floors feel solid, but the carpet in the hall and bedrooms are worn. Some wall and floor tiles in the bathroom area are cracked. There are concerns of mould close to the skirts on the south facing the walls in the second bedroom. However, there is no significant cracking evidence in the house. All the fixed electric equipment is working properly and the hot and water is running well. Phone, sewer, electricity, phone and gas are connected well. There is a small neat front garden and close to 15 fruit trees that are well kept. The title indicates no significant encumbrances.
Despite minor issues, the house is good structural condition for occupancy. The good structural condition of the property and its big site and good location helped to increase its market valuation compared to other properties in the market. The buyers will value property that does not require significant renovations and repairs. For this property, the buyers will only invest small funds in the minor renovations as most of the building structure is in good shape. Given its bigger size, better location, and better structural condition compared to the other properties, the property valuation of $600,000 is appropriate.

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