Sales Comparison and Income Approaches
Sales comparison derives value from prices of comparable transactions, adjusted for differences. Adjustments flow to the subject: if the comparable is superior, subtract; if inferior, add. Apply elements of comparison in a logical sequence - rights conveyed, financing, conditions of sale, market conditions (time), location, and physical characteristics. The order matters because some adjustments compound; time adjustment should generally follow conditions-of-sale and precede physical adjustments. Derive adjustments from paired data or market extraction, not intuition.
Income approach capitalizes expected income into value. Know direct capitalization (value = net operating income ÷ capitalization rate) and yield capitalization (discounted cash flow). Build net operating income from potential gross income, less vacancy and collection loss, plus other income, less operating expenses - but exclude debt service, income taxes, and capital expenditures from NOI (capital reserves treatment varies by convention; state your convention).
Extract capitalization rates from comparable sales (NOI ÷ price) and reconcile to the subject's risk. A lower cap rate means higher value for the same income - a common trap where candidates invert the relationship.
Worked example: potential gross income 120,000; vacancy 5% (6,000); operating expenses 40,000. NOI = 120,000 − 6,000 − 40,000 = 74,000. At a 7.5% cap rate, value = 74,000 ÷ 0.075 ≈ 986,667.
Traps: applying adjustments in the wrong direction; including debt service in NOI; and using a cap rate derived from a dissimilar risk profile without reconciliation.