Sales Comparison Approach to Value – Mass Appraisal Process

Goal

To inform property owners about the sales comparison approach to value as applied in a mass appraisal environment.

Background

The Municipal Property Assessment Corporation (MPAC) uses sales comparison as its primary valuation approach to value for approximately four million residential properties across Ontario.

The sales comparison approach to value is one of three valid approaches to value used by appraisers and assessors to value real estate. The appraisal industry generally accepts this approach as the preferred valuation methodology for residential properties.

For each reassessment, MPAC uses industry-standard Computer Assisted Mass Appraisal techniques to analyze hundreds of thousands of sales and property data across the province. Our primary valuation tool within the Computer Assisted Mass Appraisal is Multiple Regression Analysis, a statistical tool used by assessing authorities to automate the sales comparison approach to value in a mass appraisal setting.

Mass appraisal is the process of valuing a group of properties as of a fixed valuation date using common data and methods and allowing for statistical testing to determine the overall quality of the value estimates.

In mass appraisal, the sales comparison approach is applied by developing a property valuation model that develops estimates of value, based on physical and location characteristics such as building area, age, lot dimensions, and immediate neighbourhood.

All value adjustments are derived directly from the local marketplace. A mass-appraisal process results in estimates of value that are accurate in comparison to actual sales in the local market, and uniform in comparison to similar properties.

Section 19.2(1) of the Assessment Act requires that MPAC produce estimates of value as of a legislated valuation date. This requires MPAC to adjust sale prices to the legislated valuation date to reflect any market change over time.

Please refer to Glossary of Terms for legislated valuation date and Time Adjusted Sale Prices.

The Mass Appraisal Process

The following steps and information are required to develop property value estimates in a mass appraisal setting.

Complete and Accurate Data

MPAC maintains an individual data inventory for each property across Ontario. This data is updated through a review of building permits, sales investigations, requests for reviews by property owners, and periodic general inspection programs.

MPAC’s database contains over two billion pieces of data and MPAC is able to determine accurate values by utilizing this database and mass appraisal techniques – see Residential Property Assessment in Ontario.

Please refer to MPAC’s Data Collection Procedures for more information.

Creation of a Master Sales File

To develop value estimates using the sales comparison approach, MPAC analyzes sales from

  • your street;
  • your neighbourhood;
  • surrounding neighbourhoods; and
  • your city, town or township

MPAC maintains an inventory of sold properties in its corporate databases. Where required, sales are investigated to ensure they are open market transactions and to confirm the property characteristics at the time of sale. Each valid sale is placed into MPAC’s corporate Master Sales File. The Master Sales File is the sales database used to complete the mass appraisal analysis.

The Master Sales File generally contains three years of sales for most market areas across the province. In some market areas, up to five years of sales are included to ensure a sufficient number of sales are available for analysis purposes.

Please refer to MPAC’s Assessment Procedures for the Sales Review of Residential Properties for more information.

Establishing Market Areas, Locational Neighbourhoods and Sub-neighbourhoods

Each residential property in Ontario is assigned to a market area, locational neighbourhood and sub-neighbourhood for valuation purposes.

Market areas are geographic areas subject to the same economic influences. Properties in a market area tend to move up or down together in value and will be in competition with one another in the marketplace. They are usually, but need not be geographically contiguous, and typically have several thousand residential parcels, with several hundred sales to analyze.

MPAC has defined approximately 130 market areas across the province to value residential, condominium, recreational waterfront and vacant land parcels. Sales from each market area are analyzed to develop a property valuation model to value all properties within that market area.

Market areas are further subdivided into locational neighbourhoods and sub-neighbourhoods to adjust values for location within each market area. Their distinguishing characteristic is similar locational desirability. That is to say, all things remaining equal, lots of similar size and amenities will command a similar value in the market and a potential purchaser would consider buying a property anywhere within the neighbourhood’s boundaries. Typically, locational neighbourhoods contain several hundred homes, usually with at least 10-15 sales available for analysis.

Sub-neighbourhoods are defined to further review values at a micro-level as part of the individual value review process.

Definitions

Asterisk*
CV
Base Value
b1…b7
Building Area
Age
Lot Size
NBHD2
NBHD3
Garage
Fireplaces
Heavy Traffic

indicates multiplication
estimated current value
starting value applied to all properties in the market area
rates assigned to each property characteristic in the model to allocate value
total area of the home measured in square feet
age of the home
area of the lot measured in square feet
property is located in Neighbourhood 2 (0 – No, 1 – Yes)
property is located in Neighbourhood 3 (0 – No, 1 – Yes)
the number of garage spaces
the number of fireplaces
property faces street subject to a constant flow of daily traffic (0-No, 1 – Yes)

Model Specification

Model specification is the first step in the valuation work in a mass appraisal process. It determines the data to include in the property valuation model, and in what format. The model should include all property characteristics that influence value in the local marketplace.

In most cases, 85 per cent of a property’s value can be attributed to location, age, construction quality, building area, and lot dimensions. The remaining 15 per cent can be attributed to features that may affect the value either positively or negatively, e.g., a property located next to a golf course or a property located on a major thoroughfare.

One property valuation model is specified for each market area. In Computer Assisted Mass Appraisal, the most common type of model used to value residential properties is an additive Multiple Regression Analysis model. With this type of model, a base value is developed, and the property valuation model will add or subtract value based on the adjustments within the model and the property characteristics on file for your property.

A sample specified additive Multiple Regression Analysis model for single-family residential is as follows:

CV = Base Value + b1*Building Area – b2*Age + b3*Lot Size + b4*NBHD2 + b5*NBHD3 + b6*Garage + b7*Fireplaces – b8*Heavy Traffic.

Periodically, MPAC specifies “global models” by combining market areas that cover a broad geographic area. This allows MPAC to analyze a greater number of sales and determine which characteristics influence value in a positive or negative manner and which characteristics are insignificant and have little or no effect on value. These global models help to facilitate the valuation process by promoting consistency across market areas and helping to determine adjustments for seldom-occurring property characteristics with few sales.

Model Calibration

Model calibration is the development of the adjustments from the sales comparison analysis of the property characteristics to be used in the property valuation model.

A sample calibrated additive Multiple Regression Analysis model using the specified model from above is:

CV = $125,400 + $48.00*Building Area - $1,600*Age + $1.00*Lot Size - $4,800*NBHD2 + $3,000*NBHD3 + $2,400*Garage + $500*Fireplaces - $2,000*Heavy Traffic.

In this market area, a 10-year-old 1,000 square foot home located in Neighbourhood 2 on a 50 by 100 foot (5,000 square feet) lot with two garage spaces, one fireplace and subject to heavy traffic would be valued at $160,900 as follows:

CV = $125,400 + $48.00*1,000 - $1,600*10 + $1.00*5000 - $4,800*1 + $3,000*0 + $2,400*2 + $500*1 - $2,000*1.

CV = $125,400 + $48,000 - $16,000 + $5,000 - $4,800 + $4,800 + $500 - $2,000

CV = $160,900

If the same property had no garage spaces, no fireplaces, and was not subject to heavy traffic, the property would have an estimated current value of $157,600.

CV = $160,900 - $2,400*2 - $500*1 + $2,000*1

CV = $157,600

While the general value influences are consistent across each market type and area, their relative importance will vary between markets. For example, recreational waterfront markets tend to place more importance on frontage and location than non-waterfront market areas simply because of the supply and demand factors associated with a scarce commodity.

Testing the Model

Once each model is developed, it is tested to ensure it produces values that are accurate, consistent and fair. These tests are completed using industry standard sales ratio studies – see Aggregate Sales Data.

For example, values are tested to ensure older and newer homes are assessed at the same level of assessment (i.e., the model is not undervaluing newer homes and overvaluing older homes). The ratio study is completed for all major value contributors (i.e., building area, construction quality, age, lot dimensions, and location) prior to the application of the model to all properties within the market area. If the model is found to produce inaccurate initial estimates of value for a given property characteristic or neighbourhood, the problem may be corrected by re-specifying and re-calibrating the model or an adjustment may be developed based on the results of the sales ratio study.

Fine-Tuning of Values

Individual values developed using the sales comparison approach are reviewed for reasonableness and consistency with recent sales, either of the subject property itself, or of similar properties in the same area.

In situations where the estimate of current value appears to be unreasonable or inconsistent, the values are adjusted.

The purpose of this review is to reconcile the initial estimates of value to ensure that a fair and equitable assessment has been placed on each property. Unique situations will exist where individual properties may require further adjustments to achieve current value, e.g., a residential property surrounded by an industrial site.

Upon completion of the individual value review process, the estimates of value produced by the sales comparison approach to value through the mass appraisal process are considered fit for use as current value assessments.

Related Information

Section 19.1 and Section 19.2(1) of the Assessment Act
Sample Reassessment Base Year Residential Valuation Overview
Residential Data Collection Procedures

Note: The applicable law prevails to the extent there is any conflict between this information and the current law. This information is not intended to provide legal advice and should not be relied upon as such.