What number is used first if the appraiser is using the sales comparison method to value a site?

Understanding the Sales Comparison Approach

While evaluating the value of the subject property, price adjustments are made according to the features of the comparable property.

If the subject property lacks a given feature found in the comparable property, the price is adjusted downwards according to the value attributed to a given feature. Consequently, if the property comes with a valuable feature not found in the comparable property, the value is adjusted upwards accordingly. It is done until a final figure is arrived at after the comparison of at least three recently sold and similar properties.

The sales comparison approach to valuation forms a critical part of the comparative market analysis for appraisal professionals. The comparative market approach is the basis of determining the prevailing market value for property going through an acquisition. In collaboration with other appraisal methods, the sales comparison approach is an approximate estimate for sellers, investors, appraisers, and the general public.

Due to the dynamic nature and constantly changing nature of real estate markets, investors should frequently check the prices of recently listed properties for sale. The markets change rapidly, and all players should be aware of current trends. Based on the prevailing conditions, the sellers and investors can be obliged to either raise or lower their demands to be at par with the market trends.

Finding the Ideal Comparable Property

A comparable property is one that is most similar to the subject property. The similarities should match all the general details of the property. General descriptions of a property include the number of bedrooms, baths, square footage size, etc. Some of the allowable discrepancies include an extra bath, color of the paint, and other insignificant descriptions.

The comparison of comparable properties should be restricted to properties that are as close as possible in their physical location. It is because properties in different locations may have different market values even though they share a lot of similarities.

For example, residential apartments that are close to the central business district attract a higher valuation than properties than are located far away from the CBD. Another consideration that should be made is taking properties that were sold as recently as possible.

Recently sold properties come with better approximations than properties than were sold a few months or years earlier since real estate markets change regularly. If there are no comparable properties in the same location, consider recently-sold properties in nearby locations, rather than moving farther in time while searching for comparable properties.

Appraisal Adjustment Factors

1. Comparable qualities

The subject property should be as similar as possible to the comparable property, which significantly reduces the need for adjustments. Adjustments come up from the comparison differences witnessed from the subject property.

2. Ownership interest

The value of the subject can be adjusted either upwards or downwards, depending on the ownership interest of the subject property. For example, a fee simple interest is valued in a different way than a fee interest under lease. Hence, the ownership interest is a contentious issue in valuation.

3. Market conditions

Market conditions are other determinants in valuation adjustments. Real estate prices may rise or drop depending on the prevailing market trends. Sellers may drop their prices to get better chances of acquisition, depending on the competition at the moment. The market may change even in a matter of a week.

4. Location

Another determinant is the location of the property in question. Properties relatively located near key infrastructure such as airports, roads, CBDs, etc. are deemed to be of higher value than those located farther away.

Key factors, such as traffic patterns, shopping facilities, social amenities access, may also contribute to adjustments due to differences between the subject property and comparable properties.

Conclusion

The sales comparison approach capitalizes on the similarity of the two properties being compared. The similarity ranges from how recent the sale or listing is to the similarity in the description of the compared entities. It is evident that there are no identical, comparable units; hence, there is a need for adjustments depending on the differences in features.

The sales comparison approach is heavily dependent on recent sales data, and it may not be appropriate if there are no recent sales data. Therefore, a real estate appraisal lacking rich sales and recent data should use alternative means. However, in case recent data is adequate, the best-suited method of appraisal is the sales comparison real estate valuation method.

Related Readings

Thank you for reading CFI’s guide to the Sales Comparison Approach in Real Estate. In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

The sales comparison approach to appraisals involves looking at nearby, similar homes and using their valuations to come up with a market value for a home that is currently for sale. Referred to as “comps,” the homes that recently sold in the area are comparable in features, land area, quality of construction, number of bedrooms and bathrooms, etc.

This approach to home valuation, also known as SCA, can be used to set one’s list price, in which a real estate agent analyzes the market and determines a smart price.

The sales comparison approach can also be used by professional appraisers who are working for lenders. Their analysis is not focused on how much someone might possibly pay but rather how safe an investment this home is for the lender who will be offering the loan.

The sales comparison approach involves locating recently sold homes or current listings that are close matches for the home being assessed. They should be similar in terms of the number of rooms, age, amenities, and location in order to provide an accurate comparison, or “comp,” for the house in question. Recently sold homes hold more weight, since there was a definite buyer willing to pay that price.

Real estate agents and appraisers use these comps as the basis from which they determine the listing price and the valuation for the lender.

If you are selling your home, your agent will first talk to you about whether you are open to setting a price that is somewhat higher then patiently wait for an offer. You may also wish to be conservative in your pricing, or even low, to sell quickly or receive multiple offers. The agent will help you set a price based on what similar houses are selling for in the area, as well as your own priorities.

On the other hand, a residential real estate appraiser is specifically trained to assess a property objectively, without consideration of the list price or price under contract. Instead, an appraiser uses sales comps to get as close as possible to the true value of the home. They want multiple points of evidence to indicate what the lender could potentially sell the home for if they were forced to foreclose on the mortgage loan if it went into default.

An appraiser’s understanding of a home’s value helps them fill out standardized forms that are standard to the appraisal industry and required by most lenders.

• Alternative name: Comparative Market Analysis
• Acronym: SCA

For a real estate agent, a sales comparison approach would begin by looking at a list of recent sales in the area that are similar in the number of bedrooms and bathrooms, size of the lot, age of home, desirable features, and location in the approximate neighborhood. They would then average three to four of the most similar properties’ sales prices.

If the home’s past-sales comps yielded a potential list price of $200,000 but every similar home currently listed is at least $230,000, the real estate agent might advocate for a slightly higher list price, say $210,000, to take advantage of being the “bargain” in the neighborhood.

Real estate agents, like appraisers, commit to using responsible valuation practices to help clients understand the reality of a home’s value. They may also recognize if an in-demand type of home might potentially warrant a higher asking price.

For an independent appraiser working for a lender, the motivation is different even though much of the data they use is similar. If a buyer is under contract for a property that will create a mortgage loan of $200,000, the lender wants enough evidence that should the buyer default on the loan, the lender could sell the home for that price or higher given the current market conditions.

If a buyer agreed to that price because of a bidding war, and the appraiser only finds comparable properties that sold for $180,000 in the area, that poses a challenge for the lender. The seller may agree to lower the sales price by $10,000, but may ask the buyer to pay $10,000 to cover the difference.

The sales comparison approach for the home seller is a way to land on a price that is based on evidence but that also takes a seller’s desires into account. For instance, if the comparative market analysis says similar homes have sold for $180,000, but the seller thinks the home’s new back patio wasn’t fully accounted for in the comps, they might be interested in listing at $185,000, or even $190,000 if they are willing to wait a little longer for an offer.

For the homebuyer, the sales comparison approach is a bit of a “reality check” if the house was overpriced to begin with or if a competitive bidding war resulted in the sales price. While it can be disappointing when the sales comparison approach yields a value lower than the listing price (this is sometimes referred to by the phrase, "The house didn’t appraise"), it can also reopen negotiations in some cases. The buyer may realize they overcommitted in some way, or that the appraiser uncovered facts about the house that made it less of a value than expected.

• The sales comparison approach to appraisals is a way of valuing a property by looking at other listings and recent sales of homes that are as similar as possible to the home in question.
• Using sales “comps” or similar houses, both real estate agents and appraisers can understand what buyers in this area are looking for and what they will pay for it.
• Appraisers and real estate agents use the same data and may even evaluate the same comparison homes. However, appraisers want a true market value to give to the lender, while the real estate agents are using the information to price as competitively as possible for the local area, occasionally inflating the value of the home.