Sales Comparison Approach: What Is It, And How Does It Work In Real Estate?
In real estate, there must be methods to value property. Otherwise, how would we know how to price homes on the open market? The sales comparison approach is one way to appraise property.
But what is the sales comparison approach and how does it work? Let's find out in this article, as well as the factors considered in a sales comparison approach.
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What Is The Sales Comparison Approach?
Sometimes referred to as the comparable or comparative sales approach, the sales comparison approach is a method of appraising property by comparing it to similar, recently sold properties on the local market. If you’re looking to sell your home, your real estate agent or a hired appraiser may use this method to estimate the value of your property before listing it.
This method of real estate valuation helps those selling a home because it can help determine home valuation. This method of appraisal can then help home sellers price their home appropriately and helps everyone involved determine that the home price is fair in that particular market.
Sales Comparison And Appraisal: How Does It Work?
The sales comparison approach works as a method of home appraisal. A home appraisal is an unbiased professional opinion on home market value. It factors in the layout of the home, the living condition of the home, any home improvements made and nearby home values.
The sales comparison approach forms the basis for a real estate agent comparative market analysis (CMA), which estimates the value of a property. Real estate agents cannot provide an official appraisal of a home but can give a seller an idea of how to list a home using a CMA. In a CMA, agents take a look at recently sold homes in the area, called “comps," and compare the features of the comps to the features of the home about to be sold. It's a way to measure the desirability of certain home features against other recent sales.
What Factors Are Considered As Part Of The Sales Comparison Approach?
Factors that influence the sales comparison approach include the state of the market, location of the subject property, subject property features and more. Let's take a look.
Current Market State
Market conditions can be tough to pin down, which is why it's important to have comp sales dates as close together as possible. Outdated comp dates don't give you accurate pricing for the current market. The bottom line is that the current market state is taken into consideration as part of the sales comparison approach for a subject property.
The location of the subject property also matters. Comps should be as close as possible to the subject property. Ideally, the comps will be located in the same neighborhood. If it's not possible to get them in the same neighborhood, going a neighborhood or two over (with similar schools, crime rates and other features) may be the only option as part of the sales comparison approach.
Certain features of the subject property are taken into consideration as part of the sales comparison approach, including the number of bedrooms and bathrooms, number of garages, square footage and lot size. The comps should match up with the same features.
Square footage should also be the same as the comparative properties. You can divide the adjusted price of each comp by its square footage to determine the price per square foot to account for slight differences.
Age And Condition Of The Home
The age and condition of the home, based on the year the house was built, materials used in construction, renovations done and more can influence the sales comparison approach.
An ownership interest gives property owners the right to use their properties how they wish. In other words, if you own your own home, you can do whatever you want with it. For example, you can sell it, live in it or rent it out. If there are multiple owners of a property, it can affect the sales comparison approach as well.
Alternatives To The Sales Comparison Approach
The sales comparison approach isn't the only comparable sales approach available. You can also use the income approach and the cost approach as well. Let's take a quick look at both types.
The income approach to real estate appraisals, also called the income capitalization approach, is an estimation of the value of a property based on the income that the property brings in. This approach is usually used for commercial real estate. It also takes into consideration other factors. like property maintenance costs, to determine how much a property will sell for under market conditions.
The cost approach to real estate appraisals is another approach to real estate valuation by calculating how much the building would cost if it were destroyed and had to be replaced completely. It also determines the value of the land and deducts any loss in value (depreciation). The cost approach assumes that the cost shouldn't be more than it would pay to rebuild the property from the ground up.
The Bottom Line
What is the sales comparison approach in real estate? You can research the sale prices of comparable properties using the sales comparison approach to estimate a home’s value.
The uses the principle of substitution to determine what a specific home is worth. In fact a comparative sales approach helps you figure out the property’s value by matching it to the prices of similar homes.
The sales comparison approach forms the basis for a real estate agent comparative market analysis (CMA). A CMA takes into consideration the state of the market, location of the subject property, subject property features, square footage, age and condition of a home, ownership interest and more, to help determine the sales price of a home.
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