The sales comparison approach estimates the market value of a property based upon the recent sales data of similar properties by comparing the subject property to other similar properties. This is then used to help sellers determine at what price they should list their property. When using a sale comparison approach, care must be made to ensure that any adjustments between the comparable property and the subject property are taken into consideration, this will allow for the most accurate listing price possible.
The first step is to find comparable properties to base the price of your subject property on. When using a sale comparison approach to price a property accurately, several different things must be taken into account.
- The properties that are being compared should be as similar to the subject property as possible. In order to ensure a realistic sales price, the comparison properties must be in line with the property that is going to be listing. This means that things like the number of bedrooms, bathrooms, lot size, and square footage of the home should be similar.
- The properties should be close by, in the same neighborhood or subdivision.
- The comparable properties should be recently sold. Old sales dates will not give an accurate representation of what a new listing can expect to sell for.
There are some factors when conducting a sales comparison approach that can cause price differences between the subject property and comparable properties. These need to be carefully considered, as they will adjust the amount the home can be listed for. Such adjustment factors might include:
- Physical Characteristics - Things such as age, design, quality, renovations, special equipment, or features, can all significantly alter the price of a property. The addition of a pool or larger garage can make a significant difference.
- Location - Even being on an adjacent street in the same neighborhood can make a difference when it comes to properties, which is why the exact location needs to be carefully considered. Factors such as accessibility to transportation, school district, and shopping availability can play a vital role in a good price analysis.
- Market conditions - prices can trend up and down drastically in a short time, depending on the economy and the demand for real estate. Because of this, the current market conditions should be carefully assessed and considered.
- Conditions of sale - The conditions of the sale of comparable property, for example, whether or not it was an arms-length transaction, need to be taken into account. Adjustments should be made for forced sales or sales in which the buyer and seller knew each other (non-arms-length transaction).
- Use - When conducting a real estate appraisal, the property should be evaluated at it’s best use. If the comparable property or the subject property is not being utilized properly, this needs to be considered during the adjustment process as well.
- Non-realty components of value - if the comparable property was sold and included non-realty components of value (such as furnishings or appliances), then this needs to be adjusted for.
- Ownership Interest - There will be a different value placed on the property depending on whether the owner has a fee simple interest or a lease fee interest.
The ultimate goal of the adjustment process is to make the subject property as close as possible to the comparable property to yield an accurate listing price. The price will initially be based on the sales price of comparable property, and then adjusted to reflect any valuation differences accurately. There is some subjectivity involved in determining the actual price variations based on the adjustment process, as an appraiser will complete this. This means that a price will typically be presented in a value estimation range rather than as a single amount.
Overall, a Sales Comparison Approach is an essential part of the CMA process, as it ensures that a property for sale is listed at the most accurate sales price possible by comparing that property to other similar properties. The adjustment part of the Sales Comparison Approach process is the most important since no two properties are exactly the same. So care must be taken to accurately adjust for value differences between the comparable property and the subject property.