The sales comparison approach is a real estate appraisal method that compares a property to other properties with similar characteristics that have sold recently. The method takes into account the effect that individual features have on the overall property value. In other words, the total value of a property is the sum of the values of all of its features. Real estate agents and appraisers may use the sales comparison approach when evaluating properties to sell.
Understanding the Sales Comparison Approach (SCA)
The sales comparison approach helps real estate professionals and buyers determine if the price of a home is fair and comparable to the current market.
The approach is used as the backbone for comparative market analysis, which is an analysis of the prices of recently sold properties that are similar and within the same geographic area. In other words, the approach often entails looking at local properties to see what they have in common. From there, appraisers can determine a value for a property based on its features. By examining properties within the same location, it avoids using less reliable methods such as comparing property sales over a wider geographic area.
Applying the Sales Comparison Approach
Although there are many steps that a real estate appraiser can take in evaluating a property's value, outlined below are some of the most common. It's important to note that the sales comparison approach is not an official appraisal, and if a property is unique, a formal appraisal might be needed.
Location and Neighborhood
The geography of where real estate is located and the condition of the local topography could have direct effects on the value assigned to all comparable properties. For instance, a row of houses located near an airport would all have noise issues that would be part of their sales comparisons. If those same houses were located in a quieter part of the city, the valuation would be different.
It would be more appropriate to compare houses located in the same neighborhood than homes in another section of town, even if they share the same architectural designs. Some of the factors to watch out for in assessing a neighborhood include,
- Proximity to nearby schools, if any
- Water, lakes, or beaches
- Parks or common areas
- Proximity to highways or overpasses
- Abandoned buildings, railroad tracks, industrial buildings
Other external factors can come into play with an appraisal, such as pollution levels on the property and the surrounding area.
Recently Sold Listings
Review the property value of the home and the cost per square foot. Recently sold listings can help provide a starting point for the value of homes in the area. Although homes sell at different prices depending on their features and the market at the time of the sale, reviewing property values and recent sales will provide a good starting point or baseline number.
Features of Home for Sale with Similar Ones
A home should be compared with properties that have the same number of bedrooms, garages, and bathrooms. The comparison should include homes of about the same square footage on parcels of land that are about the same size.
Age and Condition of Homes
Compare the home with ones of similar age, and if an older home, whether it needs upgrades. The overall condition of the home can significantly influence an appraisal. For example, two houses may be of the same design, with the same number of rooms, but one of the houses may need of repair. There could be termite damage, issues with plumbing or roofing that must be replaced or fixed. Any improvements that are required would affect the property’s value, regardless of having comparable features.
Calculate an Average Price per Square Foot
Once the homes with similar features, age, and geographies are compiled, take each of their selling prices and divide them by their square footage. The result will yield the cost per square foot based on the homes in the sales comparison analysis. Average the cost per square footage for all of the comparable homes and multiply that number by the square footage of the home being appraised.
For example, let's look at homes in the same area and calculate their average square footage. Three homes in the area sold recently and were listed as follows:
- $300,000 with 3,500 square feet and a price per square footage of $85.70 (300,000/3,500)
- $285,000 with 2,800 square feet and a price per sq. footage of $101.78
- $232,000 with 2,500 square feet and a price per sq. footage of $92.80
- The average price per square footage for the three properties is $93.42 or ((85.70 + 101.78 + 92.80 = $280.28) / 3)
The home being appraised has a square footage of 2,600 and when we multiply the average square footage for the comparable homes, we arrive at an appraised amount of $242,892 or ($93.42 * 2,600). The analysis should provide a reasonable value for the home.
Of course, many other features might increase the value of the home. However, a sales comparison analysis is not an exact science since the value of a home is somewhat subjective, meaning one family might find more value in it than another and increase their offer. As stated earlier, outside factors such as economic conditions, the job market, and the state of the real estate market all play heavily into how much a home is sold for or how long it sits on the market.