Real Estate Sales Comparison Analysis

Understanding the Sales Comparison Approach to Real Estate Valuation

The Sales Comparison Approach is a method of real estate appraisal that estimates a property's value by comparing it to similar properties that have recently sold in the same area. This approach, also known as the market data approach, is the most common and often the most reliable method for valuing residential homes. Its core principle is that a buyer will pay no more for a property than the cost of acquiring a similar, substitute property.

The sales comparison approach is grounded in real market activity, reflecting what buyers and sellers are actually willing to pay.

The Process of a Sales Comparison Analysis

This valuation method involves a systematic process of comparison and adjustment. Appraisers follow several key steps to arrive at a professional opinion of value.

1. Selecting Comparable Properties (Comps)

The first and most critical step is to identify properties that have recently sold that are most similar to the subject property. These comparable sales or "comps" should ideally be:

• Located in the same neighborhood or a very similar market area.

  
  

• Sold within the last three to six months to reflect current market conditions.

  
  

• Similar in physical characteristics, such as square footage, age, lot size, number of bedrooms and bathrooms, and overall condition.

  
  

• Sold in an "arm's-length transaction," meaning the buyer and seller were not related and acted without pressure, reflecting a true market price.

  
  

2. Adjusting the Comparables

Since no two properties are exactly alike, appraisers make adjustments to the sale prices of the comparable properties to account for differences with the subject property. Adjustments are always made to the comparable's price, never the subject property's value.

• If a comparable property has a superior feature that the subject property lacks (e.g., a finished basement), the appraiser will subtract the value of that feature from the comparable's sale price.

  
  

• If a comparable property has an inferior feature that the subject property has (e.g., an outdated kitchen), the appraiser will add the value of that feature to the comparable's sale price.

Common factors requiring adjustments include:

• Property Characteristics: Square footage, number of beds/baths, garage space, age, condition, and special features like a swimming pool or a view.

  
  

• Location: The specific location and its unique attributes, such as proximity to a busy street or a scenic park.

  
  

• Transaction Details: Date of sale (to account for market changes over time) and any seller concessions, such as paying for the buyer's closing costs.

  
  

3. Reconciling the Final Value

After making all necessary adjustments, the appraiser has a range of adjusted sales prices for the comparable properties. The final step is to analyze these prices and use professional judgment to arrive at a final value for the subject property. Appraisers often give more weight to the comps that are most similar or required the fewest adjustments.

An Example of Sales Comparison in Action

Let’s consider a home in Meridian that is 2,000 square feet with 3 bedrooms and 2 bathrooms.

• Comp #1: Sold for $550,000. It's in the same neighborhood but has 2,200 square feet. An appraiser might deduct $20,000 for the larger size, bringing its adjusted price to $530,000.

• Comp #2: Sold for $520,000. It's the same size, but recently had a major kitchen renovation, which is valued at $25,000. The appraiser would subtract this amount, making its adjusted price $495,000.

• Comp #3: Sold for $500,000. It's similar in size and condition, but is located on a busier street, which reduces its value. The appraiser would add an adjustment of $10,000 for location, bringing its adjusted price to $510,000.

After reviewing these adjusted prices ($530,000, $495,000, and $510,000), the appraiser would analyze which comp is the most reliable and use that information to form an opinion of the subject property's value. The final opinion of value would likely be a figure within this range.