Unit of Comparison

Definition

A unit of comparison in real estate appraisal is a standard measure used to evaluate and compare the price of properties, even when they vary in size, type, or characteristics. By using a common metric, such as price per square foot or per seat, appraisers can make meaningful comparisons between properties, aiding in accurate property valuation.

Examples

To better understand how units of comparison work, consider the following scenarios:

Residential Property: When appraising a residential building, the unit of comparison could be the price per square foot. For example, if one house sold for $200,000 and it covers 2,000 square feet, the unit of comparison would be $100 per square foot.
Theater: For a movie theater, the unit of comparison might be the price per seat or per screen. For instance, if a theater with 10 screens sold for $5,000,000, each screen’s value is $500,000.
Country Club: In the case of a country club, the unit of comparison could be the price per hole of the golf course. Imagine a country club sold for $9,000,000, and it has 18 holes; thus, each hole’s value is $500,000.
Silo: For a grain storage silo, the unit of comparison could be the price per cubic foot. If the silo sold for $150,000 and it holds 50,000 cubic feet, the unit price would be $3 per cubic foot.

Frequently Asked Questions (FAQs)

What is the primary purpose of using a unit of comparison in real estate appraisal?

The primary purpose is to standardize the valuation process, enabling appraisers to compare properties consistently despite differences in size, type, or features.

How is a unit of comparison determined?

A unit of comparison is determined based on the most relevant metric for the property type, market norms, and usage patterns. For residential properties, it usually is price per square foot, while for commercial properties, it could be revenue per square foot, seat, or another relevant factor.

Can units of comparison vary by market?

Yes. Units of comparison can vary significantly based on the market and property type. For example, in some retail markets, it’s common to use price per square foot, while in other specialized markets, different metrics might be used.

Are units of comparison applicable to rental properties as well?

Yes, units of comparison are also used in rental properties to compare rental income. Common units for rental properties include price per square foot or price per rental unit.

How do appraisers handle properties lacking direct comparables?

Appraisers adjust the units of comparison based on different property features, quality, and other distinguishing factors to create comparables indirectly.

Comparable Properties/Comps: Properties similar to the subject property used for comparison in the appraisal process.
Valuation: The process of estimating the market value of a property.
Market Value: The price at which a property would sell under competitive market conditions.
Appraisal: A professional judgment or estimate of a property’s value, often required in transactions.

Online Resources

Appraisal Institute - Offers extensive resources on appraisal standards and education.
Zillow Academy - Provides tutorials and guides on property valuation and comparison.
Real Estate Appraisers Board - Regulatory news and updates relevant to property appraisal.

References

Appraisal Practices Board. (2021). “Valuation and Appraisal Practices,” Real Estate Appraisers Board.
International Valuation Standards Council. “International Valuation Standards,” IVSC.

Suggested Books for Further Study

“Real Estate Valuation and Strategy” by Joseph W. Lipsey: Comprehensive guide on valuation methods and strategic property evaluation.
“Appraising the Appraisal: The Art of Appraisal Review” by Richard C. Sorenson: Detailed insights into the standards and best practices of appraisal review.
“The Appraisal of Real Estate” by Marsha I. Weaver: A seminal textbook often referred to by appraisal professionals for both fundamental and advanced concepts.

Real Estate Basics: Unit of Comparison Fundamentals Quiz

### What is the purpose of using a unit of comparison in a real estate appraisal? - [ ] To confuse investors - [x] To standardize property valuation - [ ] To increase property prices - [ ] To reduce the appraisal process time > **Explanation:** Using a unit of comparison helps to standardize the process of valuing different properties, ensuring consistent and fair evaluations across varying types and sizes of real estate. ### Which of the following is commonly used as a unit of comparison for residential properties? - [x] Price per square foot - [ ] Price per acre - [ ] Price per cubic foot - [ ] Price per seat > **Explanation:** In residential property appraisal, price per square foot is typically used as the unit of comparison. ### Why might theaters use the price per seat as a unit of comparison? - [ ] The pricing fluctuates daily. - [x] It's a relevant metric given the nature of the property. - [ ] Costing changes infrequently. - [ ] It’s a historic appraisal method. > **Explanation:** Theaters use price per seat as a unit of comparison because it directly correlates to their revenue-producing capacity and is an industry-standard measure. ### How is the unit of comparison determined for a country club? - [ ] Price per member - [ ] Price per brochure - [x] Price per hole of the golf course - [ ] Price per square inch > **Explanation:** The unit of comparison for a country club is often price per hole of the golf course, which makes it easier to compare clubs in a standardized way. ### True or False: The unit of comparison can vary significantly by geographic market. - [x] True - [ ] False > **Explanation:** The unit of comparison can indeed vary significantly depending on the geographic market and type of property. ### How can an appraiser handle the valuation of a unique property without direct comparables? - [ ] Ignore market data - [ ] Use a random value - [ ] Apply standard units without adjustment - [x] Adjust comparables for unique features > **Explanation:** When properties lack direct comparables, appraisers adjust the values based on features, quality, and other factors to ensure an accurate comparison. ### Is the unit of comparison for a rental property always the same as that for owned property? - [x] No, it can be different depending on the income produced. - [ ] Yes, it is always the same. - [ ] It depends on the owner's preference. - [ ] Units never vary in rental appraisals. > **Explanation:** Units of comparison can vary in rental property appraisals and are often based on rental income metrics rather than purchase value. ### What is the basic unit of comparison used for silos in agricultural properties? - [ ] Price per acre - [ ] Price per pound - [ ] Price per gallon - [x] Price per cubic foot > **Explanation:** For agricultural properties like silos, the price per cubic foot is a common unit of comparison due to the storage capacity they represent. ### What type of property comparison might utilize revenue per square foot? - [x] Retail stores - [ ] Residential condos - [ ] Hotels - [ ] Industrial warehouses > **Explanation:** Retail stores often use revenue per square foot for assessment to measure their performance in generating sales relative to their floor space. ### Standardizing property valuation helps achieve which of the following? - [x] Consistency, fairness, and accuracy in appraisals - [ ] Encouragement of higher property prices - [ ] Minimization of paperwork - [ ] Elimination of regulatory requirements > **Explanation:** Standardizing property valuation ensures consistency, fairness, and accuracy in appraisals, making the process transparent and reliable.