In real estate, certain methods are used to calculate property value. Without these methods, how would we know how to price homes on the open market? The sales comparison approach (SCA) is a common way to appraise property, and that’s the method we’ll review momentarily.
So, what is the sales comparison approach and how does it work? Let’s find out as we walk through the factors considered in a sales comparison approach.
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 ensure their listing price is appropriate for their particular market.
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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 home’s conditions, improvements and special features compared to similar homes listed and sold in the same market.
The sales comparison approach forms the basis for a comparative market analysis (CMA), which your real estate agent will use to estimate the value of your property prior to an appraisal. Real estate agents can’t provide an official appraisal of a home, but they can give a seller an idea of how to list a home using a CMA. With 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.
Of course, it can be nearly impossible to find an exact match to a property being sold, so appraisers will often make adjustments where necessary to determine a home’s value. For example, if someone is selling a property that is 3,000 square feet, but all recent and relevant comps are 3,700 square feet, the appraiser may adjust the comp values down a bit so they’re more similar to the property being sold. Same when it comes to number of rooms, location features and more.
Factors That Influence The Sales Comparison Approach In Real Estate
Factors that influence the sales comparison approach include the state of the market, the location of the subject property, and home features.
Let’s take a more in-depth look at each factor.
Current Market State
Market conditions can be tough to pin down, making it important to have comp sales dates as recent as possible. Outdated comp dates will not reflect accurate pricing based on the current market. The bottom line? The current market state is considered part of the sales comparison approach for a subject property.
Location
The location of the subject property also impacts the sales comparison approach. 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.
Using the sales comparison approach with a similar locations can also provide the best pricing model for positive or adverse locations. For example, if a property is close or adjacent to railroad tracks, an agent or appraiser may compare similar homes located near tracks. Same for a property located near a lake, they would find similar waterfront homes to determine the appropriate listing price.
Property Features
Certain features of the subject property factor into the sales comparison approach. These features include the number of bedrooms and bathrooms, the number of garages, and the square footage and lot size. The comps should match up with similar features.
Square Footage
Square footage should also be similar to the comparative properties. You can divide the adjusted price of each comp by its square footage to determine the price per square foot and account for slight differences.
Age And Condition Of The Home
The condition of the home based on when the house was built, the materials used in construction, any completed renovations, and other factors can influence the sales comparison approach.
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Alternatives To The Comparable Sales Approach
The sales comparison approach isn’t the only approach available. You can also use the income approach and the cost approach. Let’s take a quick look at both.
Income Approach
The income approach to real estate appraisals, also called the income capitalization approach, is an estimation of a property’s value based on the income that the property generates. This approach is usually used for commercial real estate. It also takes into consideration other factors, such as property maintenance costs, to determine how much a property will sell for under market conditions.
Cost Approach
The cost approach to real estate appraisals is another approach to real estate valuation. It calculates how much the building would cost if something destroyed it, requiring complete replacement. Real estate valuation also determines the value of the land and deducts for depreciation – any loss in value. The cost approach assumes that the cost shouldn’t be more than it would be to rebuild the property from the ground up.
Sales Comparison Approach FAQs
Let’s take a look at some frequently asked questions about the sales comparison approach.
When is the comparable sales approach used?
The sales comparison approach is often used when similar properties are being sold within the same geographical area.
What are the sales comparison approach steps?
The steps to conducting a sales comparison approach are as follows:
- Research sales of similar properties in the area.
- Verify data across comparable properties.
- Compare sales to the subject property.
- Consider property value factors and make adjustments.
- Calculate the final market value.
How does the sales comparison approach in real estate help?
Using the sales comparison approach is helpful in determining whether the sales price of a home is comparable to the current real estate market.
The Bottom Line
The sales comparison approach forms the basis of a real estate agent’s comparative market analysis. To help determine the sales price of a home, a CMA takes into consideration the state of the market, the location of the subject property, subject property features, square footage, age and condition of a home, ownership interest and more. Appraisers will also use the sales comparison approach to determine the value of a property.
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Melissa Brock
Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.
