What Is the Sales Comparison Approach?
The sales comparison approach is an appraisal method that estimates the market value of a property by comparing it to similar properties that recently sold. 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.
How the Sales Comparison Approach Works
1. Identify Comparable Properties
Select properties that are similar in characteristics to the subject property (the property being appraised). These comparables, or "comps," should ideally be in the same neighborhood or area, with similar size, condition, age, and features.
Comps should be recent sales, typically within the last six months to a year, to reflect current market conditions.
2. Collect Data
Gather detailed information on each comparable property, including sales price, date of sale, location, lot size, square footage, number of bedrooms and bathrooms, amenities, condition, and any special features or upgrades.
3. Make Adjustments
Make adjustments to the sale prices of the comparables to account for differences between the comparables and the subject property. The goal is to ensure that the comparables are as similar as possible to the subject property.
4. Calculate Adjusted Sale Prices
After making adjustments, calculate the adjusted sale prices of the comparables. This involves adding or subtracting the dollar amount of the adjustments to the original sale price of each comparable.
5. Determine Subject Property Value
Analyze the adjusted sale prices of the comparables to estimate the value of the subject property. This can be done by taking a weighted average or considering the range of adjusted sale prices and selecting a value within that range that best represents the subject property’s market value.
Sales Comparison Approach Adjustment Factors
- Physical Characteristics
- Location
- Market Conditions
- Conditions of Sale
- Use
- Non-realty components of value
- Ownership Interest
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:
1. 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.
2. 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.
3. 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.
4. 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).
5. 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.
6. 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.
7. 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.
Sales Comparison Approach Example
Suppose you're appraising a property with the following characteristics:
- 1,500 square feet
- 3 bedrooms, 2 bathrooms
- Built in 2005
- Located in a suburban neighborhood
You find three comparable properties with these details:
Comparable 1:
- Sold for $300,000
- 1,600 square feet
- Adjustment for size: -$5,000
Comparable 2:
- Sold for $290,000
- 1,400 square feet
- Adjustment for size: +$5,000
Comparable 3:
- Sold for $310,000
- Similar size and features
- No adjustment needed
Adjusted sale prices:
- Comparable 1: $300,000 - $5,000 = $295,000
- Comparable 2: $290,000 + $5,000 = $295,000
- Comparable 3: $310,000 (no adjustment)
Based on these adjusted prices, you might conclude that the value of the subject property is around $295,000.
Sales Comparison Approach Bottom Line
The Sales Comparison Approach is a widely used method in real estate appraisal that estimates property value based on the sale prices of similar properties. By identifying comparable properties, making necessary adjustments, and analyzing the adjusted sale prices, appraisers can provide an estimate of the subject property’s market value. While it has its limitations, the sales comparison approach is a practical and effective tool for valuing residential properties and other types of real estate.